Loonie Gains Second Week as Global Growth Signs Spur Risk Demand

Canada’s dollar strengthened for a second-consecutive week versus its U.S. counterpart as the currencies of commodity producing nations rallied as investors bet on faster global growth and sought higher-yielding assets.

The currency advanced less against the greenback than the majority of its most-traded peers as a report yesterday showed inflation slowed last month, adding to speculation the Bank of Canada will hold interest rates at 1 percent for longer and dimming the appeal of the nation as an investment location. Statistics Canada will probably say retail sales rose for a fourth consecutive month in November, economists predict.

“Macro sentiment and the improvement of risk appetite overshadowed a lot of the Canada-specific news,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage said. “European bond auctions, Chinese data outweighed data out of Canada. The Bank of Canada probably won’t raise rates this year.”

The loonie, as the Canadian currency is also known, rose 1 percent to C$1.0132 in Toronto. One Canadian dollar buys 98.70 U.S. cents. Canada’s currency reached a high for the year of C$1.0071 on Jan. 19.

The dollar fetched C$1.31035 versus the euro, a 1 percent decline, after strengthening against the 17-nation common currency for the eight prior weeks.

Higher-yielding assets such as equities had five-day advances as Spain and France sold bonds at lower yields and a report showed faster-than-forecast growth in China.

Risk Rally

The Standard & Poor’s 500 Index (SPX) added 2 percent and the MSCI World Index of equities in developed nations advanced 3 percent this week. Gold rose yesterday for the third time in four days on increased demand for the precious metal, while silver jumped to a five-week high.

Canadian government bonds fell, driving benchmark 10-year yields 14 basis points higher to 2.06 percent, the highest weekly close since the five-days ended Dec. 9. The 3.25 percent securities due in June 2021 fell C$1.26 to C$110.08.

The difference between two- and 10-year government bonds widened to 101 basis points, or 1.01 percentage points, yesterday. It narrowed to 96 basis points on Jan. 17, the least since September 2008. A flatter yield curve generally indicates a worsening economic outlook.

Implied volatility for one-month options on the Canadian dollar versus the greenback fell to as low as 8.13 percent yesterday from 11 percent at year-end. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Consumer Prices

The loonie has weakened 2.7 percent in the past year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar has lost 0.6 percent and the euro has fallen 4.7 percent.

The Canadian dollar dropped yesterday versus its U.S. counterpart after a government report showed the nation’s inflation rate fell more than economists anticipated, weakening the argument for higher interest rates.

“The CPI result was a little disappointing,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said by phone from New York, referring to the consumer price index that measures inflation. “The key takeaway from those is that there’s no indication of any rate increase or removal of monetary stimulus. Even though the MPR analysis was slightly firmer in tone, the fact that there’s no policy change in the foreseeable future. The CPI reinforces that message.”

Inflation Outlook

Consumer prices fell 0.6 percent in December, compared with an advance of 0.1 percent the previous month, Statistics Canada said in Ottawa. The rate climbed 2.3 percent from a year earlier. The median forecast of 23 economists in a Bloomberg News survey was for a 0.2 percent monthly drop and a 2.7 percent annualized increase.

The Bank of Canada raised its inflation forecast for this year in a monetary report this week. Inflation will average 2.2 percent this quarter and 1.5 percent from April to June, faster than October forecasts of 1.9 percent and 1 percent, the Jan. 18 report said.

Governor Mark Carney kept his benchmark lending rate at 1 percent on Jan. 17, prolonging the longest pause since the bank began using it as a policy measure in 1994. The economy will be hobbled by a European recession and slowing growth in China and the U.S., the central bank said.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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

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