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Canadian Currency Strengthens to Parity for the First Time in Three Months

Canada’s dollar rallied to parity with its U.S. counterpart for the first time in almost three months as commodities rose after the Federal Reserve pledged to extend its freeze on U.S. borrowing costs.

The Canadian currency reached the strongest level since Nov. 1 and headed for a 1.1 percent advance on the week. Crude oil, the nation’s biggest export, reached a one-week high after the Fed signaled yesterday it plans to keep interest rates at almost zero through 2014.

“Canada’s dollar hit parity, and we’re looking for it to continue to gain against the U.S. dollar based on the Fed, higher oil and improving risk sentiment because of accommodative central banks,” said Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York.

The Canadian currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, appreciated 0.3 percent to C$1.0018 per U.S. dollar at 5 p.m. Toronto time, after touching 99.82 Canadian cents. It reached 99.75 Canadian cents on Nov. 1, the last day it traded on a one-for-one basis with the greenback. One Canadian dollar buys 99.82 U.S. cents.

The loonie trimmed its advance as the U.S. dollar erased losses against the euro, commodities pared gains and North American stocks reversed a rally after a report showed sales of new homes in the U.S. unexpectedly fell in December for the first time in four months. The Standard & Poor’s 500 Index was down 0.6 percent after rising 0.6 percent earlier, and the euro was little changed at $1.3109.

‘Psychological Level’

“Parity has been a bit of a psychological level,” said Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets unit in Toronto. “It’s always going to get a lot of movement around here.” He added that weakening wouldn’t be seen as significant unless the Canadian currency depreciated past C$1.0070 per U.S. dollar.

Government bonds advanced, pushing the benchmark 10-year note yield down three basis points, or 0.03 percentage point, to 2.02 percent. Thirty-year bond yields fell three basis points to 2.63 percent.

Canada will auction C$2.5 billion ($2.5 billion) of 10-year notes on Feb. 1, according to a statement today on the central bank’s website. The 2.75 percent securities mature in June 2022.

Raw Materials

The loonie gained for a second day as crude oil for March delivery reached $101.39 a barrel in New York, its highest level since Jan. 19, before closing at $99.86. The Thomson Reuters/Jefferies CRB Index (CRY) of raw materials advanced 0.3 percent after gaining as much as 0.9 percent earlier. Canada derives about half of its export revenue from the sale of raw materials, including crude.

The U.S. dollar fell versus all of its 16 most-traded counterparts tracked by Bloomberg except Sweden’s krona.

Goldman Sachs Group Inc. recommended yesterday its clients buy the Canadian dollar and the Mexican peso versus the U.S. currency, saying the Fed’s pledge to keep interest rates low reaffirms a dollar “weakening trend.”

The Bank of Canada may not follow the Fed in pursuing a more “proactive” monetary policy, analysts led by Thomas Stolper wrote in a note. The U.S. rate has been zero to 0.25 percent since December 2008. The Canadian central bank held its benchmark rate last week at 1 percent.

Canada’s currency will rise to 95 cents per U.S. dollar, the Goldman analysts predicted.

Forecasts Lowered

The loonie’s gains were tempered after the Fed lowered its outlook yesterday for the economy of the U.S., Canada’s biggest trade partner. The central bank cut its forecast for growth in 2012 to a range of 2.2 percent to 2.7 percent, from a projection of 2.5 percent to 2.9 percent in November. It predicted 2013 expansion of 2.8 percent to 3.2 percent, versus a previous forecast of 3 percent to 3.5 percent.

Policy makers said they anticipated U.S. unemployment will remain high and inflation “subdued.”

The Canadian dollar gained 0.1 percent over the past month against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. The Australian dollar climbed 3.3 percent, while the dollar tumbled 1.8 percent.

Brandywine Global Investment Management’s fund manager Jack McIntyre said he’s exiting the Canadian bond and currency markets because the loonie is overvalued and he sees better opportunities in Mexico.

McIntyre, who oversees $25 billion of debt at the unit of Legg Mason Inc., had about 4 percent of his holdings in Canadian dollars and bonds at the start of the year. He’s allocating funds to Mexico instead, where he said a productive workforce is luring foreign companies and investment.

“We’ve exited our Canadian positions as of a few trading sessions ago,” McIntyre said in a phone interview yesterday from Philadelphia. “Canada has gotten to be an expensive place to live and, more importantly, do business. The Canadian dollar is overvalued. Companies are shifting production away from Canada to the U.S. and Mexico.”

To contact the reporter on this story: Austen Sherman in New York at asherman18@bloomberg.net

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

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