Canadian Dollar Appreciates as Central Bank Is Seen Keeping Rates Steady

Canada’s dollar advanced versus its U.S. counterpart as policy makers prepared for a meeting tomorrow that economists predict will see interest rates remaining at 1 percent for a 12th time.

The currency rose against the euro and the majority of its most-traded peers amid concern Greece won’t get sufficient private-sector participation in a debt swap. Traders will be watching Canadian and U.S. jobs reports on Feb. 9 for signs that the North American economic recovery is intact.

“The market was caught long U.S. dollars, so there’s a bit of a pain trade as we drift back under parity,” Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, said of traders who had to cover bets the U.S. dollar would rise by buying Canadian dollars.“There’s plenty of event risk going into Friday’s numbers, so the market isn’t holding onto positions for very long.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, rose 0.5 percent to 99.74 cents per U.S. dollar at 5 p.m. in Toronto after touching C$1.0029 yesterday, the weakest level since Feb. 27. One Canadian dollar purchases $1.0024.

The Bank of Canada will leave its benchmark interest rate at 1 percent, where it’s been for more than a year, according to all 28 responses in a Bloomberg survey.

Investors are renewing bets for the first time in six months that Bank of Canada Governor Mark Carney’s next move will be to raise borrowing costs amid signs of an improving U.S. economy.

‘More Modest’

The 12-month overnight index swap rate, which is tied to forecasts for the Bank of Canada’s policy rate, advanced to a seven-month high of 1.024 percent March 1. That would suggest odds of a rate increase by October of more than 20 percent, according to Bloomberg calculations, up from zero probability a month earlier.

Policy makers led by Carney said after the bank’s most recent decision on Jan. 17 growth in Canada and the U.S. will be “more modest” than forecast in October as European leaders struggle to contain a debt crisis.

The meeting will be a non-event unless Carney “changes the mantra,” Askari said. “We’ll scour the statement for changes, such as hints of hikes quicker than anticipated due to the global crisis subsiding.”

Jobs Reports

Canadian employers added a net 15,000 jobs last month, economists in a Bloomberg survey forecast before the government issues the data March 9. Payrolls grew by 2,300 in January.

The U.S. Labor Department may say on the same day that total payrolls rose by 210,000 last month, according to the median estimate of economists surveyed by Bloomberg News. It would mark the strongest three-month stretch in almost a year. The jobless rate may have held at a three-year low of 8.3 percent.

“We’re waiting for employment on Friday,” said Firas Askari, head currency trader at Bank of Montreal (BMO) in Toronto. “The U.S. showing signs of stabilizing will be more Canadian- dollar friendly than anything else.”

Implied volatility for one-month options on Canada’s dollar versus the greenback increased from the lowest level in almost five years. It touched 8.39 percent today after reaching 6.90 percent on Feb. 24, the least on an intraday basis since June 2007. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. The five-year average is 12 percent.

Weekly Gains

The Canadian dollar gained 0.2 percent over the past five days, while the yen and the U.S. dollar each rose 1.6 percent, the highest among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes.

Crude for April delivery rose 1.1 percent, to $106.20 a barrel on the New York Mercantile Exchange. The Thomson Reuters/Jefferies CRB Index of raw materials declined 0.1 percent after falling 1.6 percent yesterday, paring the year’s gain to 2.9 percent. The MSCI World Index rose 0.4 percent.

“We’re fairly favorable on commodity currencies,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. (BK) “I would prefer to hold the Canadian dollar heading into a period of uncertainty in the euro zone, than holding the Australian dollar. The Canadian dollar benefits from a strengthening U.S. economy.”

Shorter-term government bonds fell, pushing benchmark two- year yields four basis points, or 0.04 percentage point, higher to 1.12 percent. The price of the 0.75 percent bonds due in May 2014 fell 8 cents to C$99.25.

The difference in yields between Canadian and U.S. two-year bonds widened to 81 basis points today, from 72 at the end of 2011, amid increasing expectations Carney will raise rates.

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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