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Canada Dollar Tops Majors on Wagers Borrowing Costs Will Rise

Canada’s dollar appreciated versus all of its major counterparts except for the yen this week on speculation borrowing costs will rise this year as the nation’s economy gathers momentum.

The currency posted its largest weekly gain this year against the U.S. dollar as odds climbed to more than 80 percent the central bank will raise its key lending rate by October, adding to the Canadian dollar’s allure as other developed-nation central banks increase stimulus. Canada’s economic expansion quickened in February, economists predict an April 30 report will show.

“It’s been pretty clear at the Bank of Canada that if things progress even at a reasonable pace, they would consider increasing rates a small amount, which is at odds with what you’re seeing around the rest of the world,” said Tom Levinson, a currency strategist in London at ING Groep NV, in a telephone interview. “We like the Canadian dollar, certainly against currencies like the Australian dollar.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, touched 98 cents per U.S. dollar yesterday in Toronto, the strongest since Sept. 19, and ended the day at 98.04 cents, up 1.2 percent for the week. That was the biggest gain since the five days through Dec. 23. One Canadian dollar buys $1.0199.

Government bonds fell this week, pushing the yield on the benchmark two-year note higher by seven basis points, or 0.07 percentage point, to 1.42 percent. The 0.75 percent securities maturing in May 2014 declined 12 cents to C$98.68.

Yield Spread

Federal bonds have lost 0.7 percent this year, according to Bank of America Merrill Lynch data.

The spread between two-year Canadian and U.S. two-year government debt widened to 117 basis points yesterday, the biggest gap since January 2011 on speculation central bank Governor Mark Carney is preparing to raise borrowing costs this year to counter inflation that’s rising faster than the Bank of Canada previously predicted.

Carney reiterated the bank’s forecast that the Canadian economy will grow 2.4 percent this year. Carney gave the forecast in a presentation yesterday in Ottawa. He said earlier this week in an appearance before lawmakers that interest rate increases may be necessary to counter rising inflation.

The probability of higher borrowing costs by the central bank’s October meeting rose to about 85 percent yesterday, according to Bloomberg calculations based on overnight index swaps. Odds were 19 percent on April 16, the day before policy makers suggested rates would rise sooner than economists expected as slack in the economy evaporates.

‘Policy Conundrum’

“The pressure for the Bank of Canada to eventually raise rates can only grow,” amid a U.S. recovery and a central bank on “permanent hold,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA, by phone from London. “The policy conundrum is going to get bigger not smaller.”

Canada’s gross domestic product expanded 0.2 percent in February, compared with 0.1 percent in the previous month, according to the median of 24 projections compiled by Bloomberg. Statistics Canada is due to release the report at 8:30 a.m. Ottawa time in two days.

The world’s 10th largest economy will grow at a 2.5 percent annualized pace this quarter, up from a January estimate of 1.8 percent, the Bank of Canada said in an April 18 quarterly policy report. Inflation will average 2 percent through June, higher than a previous estimate of 1.5 percent.

Crude Oil

GDP, the value of all goods and services produced in the U.S., rose at a 2.2 percent annual rate after a 3 percent pace, Commerce Department figures showed yesterday. The median forecast of economists surveyed by Bloomberg News called for a 2.5 percent rise.

Carney said yesterday in Ottawa that borrowing costs in Canada are “exceptionally low” and high consumer debt in the nation “calls for prudence.”

Futures on crude oil, Canada’s biggest export, increased 1.7 percent this week to $104.76 barrel. Copper futures climbed 3.8 percent to $3.8340 a pound in New York. Raw materials account for about half of Canada’s export revenue.

The Canadian dollar rose 1.9 percent during the past three months in the second-best performance among the 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The biggest gainer was the British pound, up 3.2 percent.

The loonie, which traded as low as C$1.0319 in January, will weaken to parity with its U.S. counterpart by the end of June before strengthening to 98 cents at year-end, according to the median of 40 forecasts compiled by Bloomberg.

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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