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Canadian Dollar Advances to 3-Week High on U.S. Inflation Data

The Canadian dollar reached the strongest level in three weeks against its U.S. peer as a report showed American inflation is contained, giving the Federal Reserve scope to maintain its monetary stimulus program.

Canada’s currency pared its gain after the nation’s existing home sales fell 2.1 percent in February from the previous month, the Canadian Real Estate Association said. The Canadian dollar had its first five-day gain in six weeks against the greenback after touching an eight-month low on March 1, boosted by data March 8 that showed both the U.S. and Canada created more jobs than estimated in February. Fed policy makers meet next week to review the bank’s bond-buying program.

“The corrective downside to U.S. dollar-Canadian dollar has got some legs, and could have some more legs,” Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA), said by phone from Toronto. “Heading into the Fed meeting, you could see some more U.S. dollar selling.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.3 percent to C$1.0194 per U.S. dollar at 5 p.m. in Toronto after reaching C$1.0181, the strongest level since Feb. 22. It gained 0.9 percent this week. One loonie buys 98.10 U.S. cents.

Canada’s benchmark 10-year government bonds rose, with yields falling five basis points, or 0.05 percentage point, to 1.90 percent. The 2.75 percent security maturing in June 2022 gained 45 cents to C$107.20.

Oil Rises

Futures on crude oil, Canada’s largest export, advanced 0.6 percent to $93.58 a barrel in New York, after earlier touching $93.84 per barrel, the strongest since Feb. 25.

Oil prices holding above 90 hasn’t hurt the Canadian dollar,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “Sentiment coalesced making the Canadian dollar a weak currency, and people are now taking some money off of the table.”

Traders were the least bearish on the loonie in six weeks as so-called risk-reversals show options traders are paying the least for protection against loonie weakness since Feb. 2. The three-month 25-delta risk reversal rate fell to 0.98 percentage point from 1.49 percentage points on Feb. 26, its highest since Sept 7.

Futures traders moved in the other direction, increasing their bets that the Canadian dollar will decline against the U.S. dollar to the highest level in six years, figures from the Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie compared with those on a gain -- so-called net shorts -- was 53,397 on March 12, the most since March 2007, compared with net shorts of 46,663 a week earlier.

Economic Indicators

The loonie rose as U.S. consumer prices increased 2 percent in the 12 months ended in February, after a 1.6 percent year- over-year gain the prior month, a Labor Department report showed today in Washington. The core CPI, excluding food and energy, also rose 2 percent from February 2012, following a 1.9 percent advance in the prior 12 month period. The U.S. is Canada’s largest trade partner.

Canada’s dollar pared gains as home sales in Vancouver fell 9.8 percent to 1,759 units, while sales in Toronto declined 2.8 percent to 6,743 units. Overall sales slid to 34,954 units from January, when they rose 1.3 percent, the realtor said.

The ratio of Canadian household debt to disposable income rose to another record last quarter, with debt including mortgages reaching 165 percent of disposable income, compared with 164.7 percent in the prior three-month period, Statistics Canada said today in Ottawa.

Central Bank

“This home data certainly will not strengthen the case Canada’s turning the corner on some of the weak data we’ve seen recently,” Don Mikolich, executive director of foreign-exchange sales, said by phone from Toronto. “Where the strong employment numbers last Friday had put the breaks on the Canadian dollar slide against the U.S., we’re going to need more data points to decide whether that was an aberration or not.”

The loonie has gained 0.9 percent since reports last week showed employment gains in Canada and the U.S. exceeded forecasts, with both nations’ unemployment rates at four-year lows.

The loonie has lost 0.5 percent this year against nine developed nation peers tracked by the Bloomberg Correlation Weighted Index. The greenback has gained 2.5 percent and the Japanese yen has lost 7.6 percent, the biggest decline in the index.

To contact the reporters on this story: Taylor Tepper in New York at ttepper2@bloomberg.net; 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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