Canada’s dollar traded stronger than parity with its U.S counterpart on average this year for the first time in three decades as investors sought assets of highly rated governments as a haven from euro-area debt woes.
The currency averaged 98.92 Canadian cents per U.S. dollar in 2011, the highest annual value since 1976, when it traded at 98.63 cents. It averaged C$1.5701 in 2002, the lowest since at least 1971, when data began. Canada’s dollar had its strongest annual close against the euro since the shared currency began trading in 1999, underscoring the nation’s top debt ratings and economic stability amid Europe’s sovereign-debt crisis.
“The Canadian dollar has done well this past year because of our position in the global economy,” said C.J. Gavsie, managing director for foreign-exchange trading at Bank of Montreal in Toronto. “Years of conservative practices by our government, central bank and various regulators have contributed to a steady economy and now a currency that is relatively stable to other majors.”
The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, ended the year at C$1.0213 versus the U.S. dollar, from 99.80 Canadian cents at the end of last year for a loss of 2.3 percent. It rose 0.9 percent to C$1.3237 against the euro. It lost 7.9 percent to 75.32 yen. One Canadian dollar buys 97.91 U.S. cents.
The Canadian dollar touched 94.07 cents per U.S. dollar on July 26, the highest in more than three years, on prospects for higher interest rates (CABROVER) and as investors sought shelter from the U.S. debt-ceiling impasse. The currency weakened from there, touching C$1.0658 on Oct. 4, the lowest level in more than a year, as the euro region’s debt crisis sapped demand for higher- yielding assets such as stocks.
Canada and the U.K. are the only Group of Seven countries - - which also include the U.S., Germany, France, Italy and Japan -- that have both a AAA rating and a “stable ” outlook, according to data compiled by Bloomberg. Canada’s economy is expanding 3 percent from a year earlier, more than double the average rate for G-7 and euro-zone countries. Finance Minister Jim Flaherty pledged his Conservative Party government will eliminate the budget deficit, forecast at C$31 billion this fiscal year, by 2015.
After lifting the target rate three times last year from a record low 0.25 percent, Bank of Canada Governor Mark Carney has held borrowing costs steady at 1 percent since September 2010, even as inflation (CACPIYOY) exceeded the bank’s 2 percent target for 12 straight months.
The global economy risks entering into a “prolonged period of deficient demand” as governments in the U.S. and Europe struggle to reduce debt burdens, Governor Mark Carney said in a Dec. 12 speech. Trading in overnight index swaps shows almost a 40 percent chance of a reduction in the central bank’s target rate to 0.75 percent by September.
Movements in the Canadian dollar have been increasingly tied to equities. The one-month correlation coefficient between the Standard & Poor’s 500 Index (SPX) and the Canadian dollar reached 0.9348 on Nov. 14, the strongest relationship since Bloomberg data began in 1992, versus a two-decade average of 0.2437. A reading of 1 indicates the measures move in lockstep. It ended the year at 0.854. The S&P 500 rose 0.3 percent this year.
The loonie, with losses of 1.4 percent, is the fourth-worst performer in 2011 after the euro, the Norwegian krone and Sweden’s krona among the 10 major currencies tracked by Bloomberg Correlation Weighted Indexes. It’s the best performer in the past month after the yen, gaining 1.7 percent on speculation the U.S. economy will recover from its torpor.
“As we leave 2011, that which was the albatross around the loonie’s neck is that which gives it lift in 2012 -- that’s the U.S. economy,” said Stewart Hall, senior currency strategist at Royal Bank of Canada in Toronto. “The U.S. economy of late has been throwing off upside economic surprises. To the degree to which it can continue to do that, it sets the stage for a firmer profile for the Canadian dollar versus some of the other G-10 currencies.”
Respondents to a Bloomberg survey predict the U.S. economy will expand by 2.1 percent next year, the median of 70 responses. Canada’s economy will grow at a 2 percent pace next year, a separate survey shows.
RBC predicts the Canadian dollar will end 2012 at parity with the U.S. dollar. BMO’s Gavsie forecast the currency would average C$1.04 in 2012, with a range of 98 cents to C$1.08.
It will depreciate to C$1.04 by the end of the first quarter before rebounding to parity by year-end, according to median forecasts of 33 analysts and economists in a Bloomberg survey. Those forecasts have weakened from C$1.02 and 98 Canadian cents at the end of November.
Canada’s government bonds (GCAN5YR) rose in 2011, driving yields across the curve to record lows. The nation’s benchmark 10-year yields fell to 1.94 percent, compared with 3.12 percent at the end of last year. The yield touched 1.837 percent on Dec. 16, the lowest level in data compiled by Bloomberg going back to 1989. Benchmark two-year yields touched 0.76 percent on Sept. 12, a record low.
Ten-year government securities (.USCAD10) yielded 6 basis points more than equivalent-maturity U.S. Treasuries, compared with 32 basis points more on Sept. 5, the most this year, and 17 basis points less at the end of last year.
Canadian employers added 17,500 positions more than they cut in December, according to the median of 17 forecasts compiled by Bloomberg. Statistics Canada is due to release the data on Jan. 6 in Ottawa.
“More stable economic and monetary-policy trends for Canada are helping contribute to overall resilience in this currency,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.
To contact the reporter on this story: Chris Fournier in Montreal at firstname.lastname@example.org