Canada’s Dollar Appreciates as Bank of Canada Carney Highlights Growth

Canada’s dollar rose for a second day after Bank of Canada policy makers said growth in the domestic and U.S. economy is stronger than forecast, easing speculation the central bank would signal further monetary easing.

Canada’s currency erased a decline after the central bank kept its main interest rate unchanged at 1 percent. Although Europe’s widening debt crisis is raising risks to the global economy, there is “considerable monetary stimulus” in Canada with interest rates near historic lows and the financial system “functioning well,” policy makers led by Governor Mark Carney said in a statement from Ottawa today.

“There was an expectation in the market of a more dovish statement, but we got nearly a carbon copy of the last decision, which is supportive of the Canadian dollar,” said Stewart Hall, senior currency strategist at Royal Bank of Canada in Toronto. “The Canadian economy has been better than expected, and the domestic profile augurs for a policy leaning toward a neutral policy footing rather than one that continues monetary stimulus.”

Canada’s currency appreciated 0.6 percent to C$1.0100 per U.S. dollar at 5 p.m. in Toronto, after falling as much as 0.4 percent. One Canadian dollar buys 99.01 U.S. cents.

All 26 economists surveyed by Bloomberg News predicted the central bank would hold rates steady.

The loonie has been the second-best performer after the yen in the past month against the U.S. dollar among the most-traded currencies, gaining 0.3 percent, as investors sought refuge from the European crisis without the risk of U.S. budget deficits and political deadlock.

‘On Hold’

Canada’s economy is growing at 3 percent, twice the average pace of Group of Seven and euro-area nations.

“The bottom line is that they are on hold and it will take more weakness domestically to change their tune, and this is giving support to the Canadian dollar” said Michael Gregory, a senior economist in Toronto at Bank of Montreal, the nation’s fourth largest bank. “They are no closer to easing rates.”

European leaders have spent two years struggling to prevent contagion from affecting the region’s largest economies. Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrades, Standard & Poor’s said yesterday.

Yields on 10-year Government of Canada bonds rose four basis points, or 0.04 percentage point, to 2.13 percent.

“The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October,” Bank of Canada policy makers said in the statement. “There is considerable monetary policy stimulus in Canada,” the bank said, echoing its Oct. 25 decision when policy makers removed a reference to the need for paring monetary stimulus.

‘Fair Value’

Royal Bank of Scotland Group Plc suggested that investors unwind a Nov. 3 trade recommendation to bet the euro would decline against the loonie. The Canadian dollar has strengthened 2.8 percent versus the euro since the call.

“The divergence from our ‘fair value’ estimate is so wide we can no longer justify the position,” Robert Sinche, global head of currency strategy at RBS in Stamford, Connecticut, wrote in a report today.

Carney will be the only central bank leader in the Group of 10 countries to raise interest rates next year, according to forecasts compiled by Bloomberg News. Inflation has exceeded the bank’s 2 percent target for 11 months as the economy grows at double the pace of the G-7 nations.

Policy Statement

A measure of price pressures -- the three-month, seasonally adjusted annualized inflation rate that excludes food and energy -- has accelerated to 3.2 percent in October, the fastest since 2003, signaling a growing momentum in consumer price increases.

The bank today said it would “continue to monitor carefully economic and financial developments,” and “set monetary policy consistent with achieving the 2 percent inflation target over the medium term,” repeating language it used in October.

“Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels,” the bank said today. The statement also reiterated Carney’s comment last month that the economy would return to full capacity “well into 2013,” a slight change from the October prediction that full output would resume by the end of that year.

“Canada is in a unique position in that they are less exposed to Europe and China and more heavily reliant on the U.S.,” Kathy Lien, director of currency research at the online trading firm GFT Forex in New York wrote in a note to clients. That the Bank of Canada “did not even hint about the possibility of lower interest rates was enough to send the Canadian dollar sharply higher.”

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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