Canada Dollar Gains Most This Year as EU Deal Stokes Risk Demand

Canada’s currency advanced the most since November after European leaders agreed to relax conditions for emergency loans to Spanish banks, easing demand for havens and driving stocks and commodities higher.

The currency extended its weekly and monthly increases after the nation’s statistics agency reported the economy expanded in April more than forecasters predicted, reducing odds of central bank interest-rate cuts.

“Today is all about squeezing the short euro players,” Firas Askari, head currency trader at Bank of Montreal (BMO) in Toronto, wrote in an e-mail, saying the Canadian dollar is benefiting from the move higher in the euro and stocks. “The European result is a good first step, but the devil is always in the details and the implementation.”

Canada’s dollar, nicknamed the loonie, climbed 1.6 percent to C$1.0166 per U.S. dollar at 5 p.m. in Toronto, rising the most on an intraday basis since Nov. 30. One Canadian dollar buys 98.37 cents. The currency rose 0.8 percent this week and 1.6 percent in June.

“I don’t think there’s a lot more upside to the Canadian dollar from these levels,” Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS)’s Scotiabank, said by e-mail. “Worries over Asia, worries over the U.S. and the situation in Europe is still dire. Band-aids are short-term solutions.” Butler said the “ideal place” to sell the Canadian dollar and buy U.S. dollars is in the area between C$1.0120 and C$1.0140.

The world’s 10th largest economy expanded 0.3 percent following a March gain of 0.1 percent, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News projected a 0.2 percent gain, based on the median of 23 estimates. Mining and oil and gas extraction advanced 2.7 percent, after declining in the previous two months following maintenance shutdowns.

‘Moderately Encouraging’

Odds of a cut in the central bank’s overnight target rate by year-end fell to about 30 percent after the gross domestic product report, from 45 percent yesterday, according to Bloomberg calculations on overnight index swaps.

Canada’s dollar gained along with other risk-sensitive currencies, tracking the 17-nation euro higher, as European Union President Herman Van Rompuy said officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status.

“A moderately encouraging European Union summit helps smooth a major tail risk for the global economy -- that’s positive for commodity currencies,” Tom Levinson, a currency strategist in London at ING Groep NV, said in a telephone interview.

The Standard & Poor’s 500 Index climbed 2.5 percent. Oil for August delivery gained 9.2 percent to $84.87 a barrel on the New York Mercantile Exchange, the biggest one-day rally since March 2009. Crude is Canada’s largest export.

Linkers Slump

Government bonds declined, pushing the yield on the benchmark 10-year bond higher by six basis points, or 0.06 percentage points, to 1.74 percent. The price of the 2.75 percent security maturing in June 2022 declined 58 cents to C$109.18.

Canadian government bonds that allow investors to hedge against gains in consumer prices are posting their worst first- half returns in five years as traders’ expectations for inflation drop to the lowest level since 2009.

The so-called linkers are up 2 percent since January, the least since the comparable period in 2007, according to Bank of America Merrill Lynch index data. The break-even rate on the 10- year security, a measure of what traders predict consumer price increases will average during that period, touched 1.786 percentage points yesterday, the lowest level since May 2009.

The loonie has gained 0.8 percent this year among 10 developed-nation currencies in Bloomberg Correlation Weighted Indexes, with the U.S. dollar adding 0.2 percent. The leading decliners are the yen, falling 3.8 percent, and the euro, dropping 2.3 percent.

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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