Canada Dollar Close to 3-Week High Versus Euro Before ECB

The Canadian dollar traded at almost a three-week high against the euro on speculation the European Central Bank will show a bias toward lower interest rates at a meeting of policy makers tomorrow.

ECB President Mario Draghi is projected to maintain the bank’s rate target at 0.75 percent, where it’s been since July 2012, according to the median estimate of a Bloomberg survey of 55 economists, while the Bank of Canada has a bias toward raising its target rate. Canada’s dollar was little changed against its U.S. counterpart after a report showed the nation’s housing market slowed in December, signaling the country may avoid a housing bubble.

“Most likely what we’ll see tomorrow is that rates are on hold, but the attention turns towards President Draghi’s press conference where he’s likely to sound particularly dovish, particularly as we have unemployment at new record highs in Europe and inflation that’s still fairly contained,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia by phone from Toronto. “So I expect we hear a fairly dovish ECB president and that does weigh on the euro overall.”

The Canadian dollar, called the loonie for the image of the aquatic bird on the C$1 coin, rose 0.1 percent to C$1.2903 per euro at 5:10 p.m. in Toronto, close to its highest level since Dec. 13. The loonie fell 0.1 percent to 98.76 cents per U.S. dollar. One Canadian dollar buys $1.0126.

Crude oil, Canada’s largest export, rose 0.1 percent to $93.25 per barrel and the Standard & Poor’s 500 Index added 0.3 percent.

Bond Trades

The country’s long-term bonds were little changed with yields on the benchmark 10-year note at 1.91 percent. The 2.75 percent security due in June 2022 fell four cents to C$107.19.

The Bank of Canada auctioned C$3.4 billion ($3.5 billion) of five-year notes at an average yield of 1.494 percent. The 1.25 percent notes due in March 2018 drew bids totaling $9.09 billion.

The bank will release details tomorrow about an auction of two-year notes on Jan. 16.

The loonie erased earlier losses against the U.S. dollar after data showed construction starts were 198,000 at a seasonally adjusted annual pace last month, down from a revised 201,400 in November, according to Ottawa-based Canada Mortgage & Housing Corp. The Bank of Canada has called drops in house prices caused by oversupply a threat to the economy, prompting the government to tighten mortgage rules in June.

Economic Conditions

“In terms of the long-term fundamentals for the Canadian dollar, it’s good for the Canadian economy,” David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “It’s better if our housing market slows and new construction slows. It means the Bank of Canada won’t be forced to tighten policy too aggressively, which is positive for the overall economy.”

The Bank of Canada has warned it would increase interest rates as the economy returned to full capacity in every policy statement since April, and governor Mark Carney cited the rising consumer debt load for things like mortgages, which a hit a record in the third quarter, as another sign rates were too low.

Trading in overnight index swaps show a 31.5 percent chance of the Bank of Canada raising interest rates at its September meeting, according to data compiled by Bloomberg. The central bank has kept the benchmark rate at 1 percent since September 2010, the longest pause since the 1950s.

Technical Levels

The currency has strengthened since the U.S. passed a budget deal last week to avoid automatic austerity measures and trades above its 50-, 100- and 200-day moving averages. The U.S. still faces a political battle over increasing its debt limit to avoid default, which Republican members of the House of Representatives have promised to block unless there are sufficient spending cuts.

“It has the potential to be more catastrophic than the actual fiscal cliff in itself, just because it would really hurt confidence,” said Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities by phone from Toronto. “With another hurdle that needs to be dealt with in the next month, month and a half, the prospect of any moves in the Canadian dollar is quite low.”

Canada’s currency has gained 1 percent this month versus nine developed-nation peers tracked by Bloomberg Correlation- Weighted Indexes. The greenback has dropped 0.5 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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