Canadian Dollar Gains as Japan’s Stimulus Spurs Demand for Yield

The Canadian dollar touched the highest level against its U.S. counterpart in almost two months as the Bank of Japan (8301)’s monetary stimulus measures sent investors in search of higher-yielding currencies.

The loonie, as the currency is nicknamed, gained before a Bank of Canada policy meeting April 17 in which the central bank is projected to lower growth forecasts after economic data trailed estimates. Bank of Japan Governor Haruhiko Kuroda’s announcement April 4 the central bank would step up asset purchases that devalue the currency prompted investors to sell the yen against all its major peers.

“The vast majority of moves have been driven by yen weakness,” said John Curran, a senior vice president at CanadianForex Ltd. by phone from Toronto. “The market is just selling yen wholesale, which feeds into all other currencies being bolstered by that, which is rather confusing, given all the fundamentals out there, but that’s what’s happening. When the yen trade dies down you will see a return to normalcy and the Canadian dollar should weaken off.”

The loonie rose 0.4 percent this week to C$1.0136 per U.S. dollar in Toronto, touching C$1.0084 on April 11, its strongest level since Feb. 18. One loonie buys 98.66 U.S. cents.

Futures Positions

Hedge funds and other large speculators increased their bets that the Canadian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 71,133 on April 9, the most since March 16, 2007 and compared with net shorts of 64,544 a week earlier.

Traders hedging against bets the Canadian dollar would fall may explain the loonie’s increase this week, said Sebastien Galy, a foreign-exchange strategist at Societe Generale SA.

“It’s mostly short-covering, people went too bearish,” he said by phone from New York. “The market remains CAD short at least on a speculative basis and if you talk to larger accounts in Canada they will be waiting to buy CAD at a lower level than it currently is, I don’t think they’d be comfortable buying CAD were it is.”

Price Swings

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart has fallen 30 basis points to 6.04 percent since April 8, when it reached its highest point in three weeks. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Canada’s 10-year benchmark government bond rose, with yields falling two basis points, or 0.02 percentage point, to 1.74 percent. The 1.5 percent security maturing in June 2023 rose 14 cents to 97.82 cents.

The Bank of Canada will announce additional details on April 18 for a two-year debt sale scheduled for April 24.

Crude oil, the country’s biggest export, fell 2.2 percent to $90.66 per barrel as the Standard & Poor’s 500 Index of U.S. stocks rose 2.3 percent.

The discount Canada faces on its heavy crude oil compared to the U.S. benchmark increased to $13.75, after starting the week at $12, the least since Oct. 4. Refinery shutdowns and lack of infrastructure for reaching market sent the discount to a record $42.50 Dec. 14.

Economic Data

U.S. retail sales contracted in March, data April 12 showed, adding to signs on both sides of the border the North American economy is slowing. Government reports on April 5 showed Canada lost jobs in March and the U.S. added fewer jobs than economists had forecast.

The data prompted economists to cut two-year yield forecasts in a monthly Bloomberg survey at the fastest pace in more than a year as they predict the Bank of Canada will trim growth forecasts for the year when it meets next week.

Year-end yield forecasts for two-year bonds dropped by 20 basis points in April to 1.2 percent, after falling 15 basis points in March, the biggest back-to-back revision in the median of estimates of Bloomberg’s monthly survey since January 2012.

The Bank of Canada will keep its benchmark interest rate at 1 percent when it meets April 17, according to all 23 economists surveyed by Bloomberg.

Forecast Time

“The question comes down to what growth assumptions are put on the board,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London.

The Australian and Canadian dollars will be separately identified in the International Monetary Fund’s data on official reserve holdings from the third quarter as demand for the currencies from central banks increases, the fund said April 12. More than 75 percent of 60 central banks polled in February are investing in or may buy the two currencies, Royal Bank of Scotland Group Plc said April 7. The IMF releases quarterly data on $6.1 trillion in allocated reserve assets in its Composition of Official Foreign Exchange Reserves report.

The Canadian dollar has fallen 0.7 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, trailing its commodity exporting peers Australia and New Zealand, whose currencies have risen 2.9 percent and 5.8 percent this year. The U.S. dollar has risen 1.7 percent this year and the euro has gained 1 percent.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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