Canadian Currency Reaches Four-Month High Amid Increased Demand for Risk

Canada’s dollar strengthened to the highest level since October against its U.S. counterpart as increased demand for higher-yielding assets bolstered stocks and currencies of some commodity-exporting nations.

The Canadian currency traded within a two-cent range this week as retail sales fell while employment data improved in the U.S., Canada’s biggest trade partner. The nation’s economic growth slowed in the fourth quarter, data next week may show. The loonie, as the currency is called, slid versus the euro on bets an international bailout deal will save Greece from default, easing concern Europe’s debt crisis will worsen.

“No news is good news for the Canadian dollar,” Michael O’ Neill, vice president of foreign-exchange trading at RJOFX Canada, a unit of RJ O’Brien & Associates Inc., said, referring to news headlines on Europe. He spoke yesterday by phone from Toronto. “In the medium term, it’s grinding higher.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, declined 0.3 percent to 99.93 cents per U.S. dollar yesterday in Toronto, from 99.68 cents on Feb. 17. It touched 99.07 cents on Feb. 20, the strongest level since Oct. 28, and depreciated to C$1.0020 on Feb. 20, the weakest since Feb. 16. One Canadian dollar buys $1.0007.

O’Neill recommended buying the Canadian dollar on weakness.

U.S. Household Spending

Canada’s currency weakened even as crude oil, its biggest export, climbed. The loonie fell against 14 of its 16 most- traded peers amid speculation that higher oil prices will crimp American household consumption. That might weaken Canada’s exports, about 75 percent of which go to the U.S.

Crude oil for April delivery gained 5.4 percent to $109.71 a barrel in New York this week and touched $109.95 yesterday, the highest level since May 4.

The Dollar Index (DXY), which IntercontinentalExchange uses to track the greenback against the currencies of six major trading partners, including Canada, fell 1.3 percent this week. It was the biggest decline since January. The South African rand and the Norwegian krone were among the best-performing major currencies. Both countries export commodities.

“The U.S. dollar is generally weak, and that tends to drag the Canadian dollar down on the crosses as well,” said Adam Cole, global head of foreign-exchange strategy at Royal Bank of Canada’s RBC Capital Markets unit in London, referring to trades with currencies other than the greenback.

Volatility Drops

Implied volatility for one-month options on the Canadian dollar versus the greenback touched 6.90 percent yesterday, the lowest level on an intraday basis since June 2007. It closed at as high as 15.6 percent in September. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. It averaged about 10 percent over the past decade.

The Standard & Poor’s 500 Index rose 0.3 percent in a second weekly advance, and the MSCI World Index of equities in developed countries increased 0.9 percent in its second straight five-day gain.

The Canadian currency dropped for a seventh day versus the euro, the longest losing streak since April, on bets officials are succeeding in containing the European debt turmoil. Euro- area finance ministers reached agreement Feb. 21 on a 130 billion-euro ($175 billion) aid package for Greece, where the crisis began two years ago. The loonie dropped as much as 0.9 percent to C$1.3454 versus the common currency, the weakest since December.

The currency pair “looks set to test back toward C$1.35 as investors continue to close out euro shorts, perhaps in the misguided assumption that Europe is now saved by recent events,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. A short position is a bet that a currency will depreciate.

Bonds Gain

Most Canadian government bonds rose, pushing benchmark 10- year note yields down two basis points, or 0.02 percentage point, to 2.02 percent. Yields reached 1.837 percent in December, a record low. The 3.25 percent securities due in June 2021 increased 17 cents to C$110.33. Two-year yields were little changed at 1.07 percent before the government auctions C$3.5 billion ($3.5 billion) of the maturity on Feb. 29.

The difference between two- and 10-year government bonds, known as the yield curve, narrowed to 95 basis points yesterday, from 97 a week earlier. It shrank to 92 basis points on Feb. 1, the flattest since September 2008. A flatter yield curve generally indicates a worsening economic outlook.

Losing Year

The loonie weakened 3.2 percent over the past year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar has lost 1 percent and the euro has fallen 3.4 percent.

Central banks in the U.S., Europe and Japan will probably add further extraordinary stimulus by expanding the size of their balance sheets, which already equal 25 percent of their gross domestic product, Bank of Canada Governor Mark Carney said in a speech he gave yesterday in New York.

Carney will keep his key interest rate at 1 percent through this year to aid the recovery, and the currency will trade at close to parity with the U.S. dollar, according to Bloomberg surveys of economists. Last month, the central bank predicted economic growth of 2 percent this year, with risks from global demand and household spending.

Canadian gross domestic product increased at an annualized 1.8 percent in the fourth quarter of 2011, according to the median of 23 forecasts compiled by Bloomberg. It gained at a 3.5 percent pace from July through September. Statistics Canada will release the data on March 2 in Ottawa.

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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