Canadian Dollar Strongest Since February as Economy Expands

The Canadian dollar reached the strongest level since February after the nation’s economy grew faster than forecast and speculation increased that U.S. policy makers will sustain monetary stimulus measures.

The currency rose for the fifth day against its U.S. counterpart as Statistics Canada said gross domestic product increased 0.3 percent in February, putting the economy on track for its fastest quarterly growth since 2011. The U.S. dollar weakened against most major currencies after a private report showed business activity unexpectedly shrank in April for the first time in more than three years.

“For Canada, we’ve had better economic data, so that’s encouraging and the broad move in the U.S. dollar is lower,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS), said by telephone from Toronto.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose as much as 0.6 percent to C$1.0054 per U.S. dollar, the strongest level since Feb. 15, before trading at C$1.0073 at 5:00 p.m. in Toronto. One loonie buys 99.28 U.S. cents.

The loonie gained 1 percent in April, the second consecutive monthly gain against the greenback.

Canada’s 10-year government bonds were little changed to yield 1.7 percent. The 1.5 percent security maturing in June 2023 rose 4 cents to C$98.20. Yields dropped 2 basis points in April. The Bank of Canada will sell C$2.9 billion more of the benchmark securities tomorrow.

Crude oil, Canada’s largest export, fell 1.6 percent to $93.01 per barrel, trimming its monthly gain to 4.3 percent, while the Standard & Poor’s/TSX Composite Index rose 1.2 percent yesterday to 12,456.50.

Carney Speculation

Finance Minister Jim Flaherty says he will soon name a replacement for Bank of Canada Governor Mark Carney, who is leaving June 1 to head up the Bank of England. Flaherty said yesterday the process of finding a replacement is drawing to a close.

Economists surveyed by Bloomberg after Carney announced his departure named Senior Deputy Governor Tiff Macklem as the most likely replacement. The second-most likely candidate is Export Development Canada Chief Executive Officer Stephen Poloz, JPMorgan Chase & Co. said in a March 19 report. The Globe and Mail newspaper said Stanford University finance professor Darrell Duffie is also a candidate.

Canada’s GDP report suggests economic growth in the first quarter was faster than 2 percent, about the pace the central bank says output can rise before inflation pressures build up. That’s up from the 0.6 percent annualized pace set at the end of last year as exports and investment slumped.

“Take any move today with a substantial grain of salt,” said David Watt, chief economist at the Canadian unit of HSBC Holding Plc, by phone from Toronto. “I just don’t expect any strength coming out of this report to be sustained, because I think we’re going to see that reversal in March.”

U.S. Outlook

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 5.69 percent, the lowest level since January 18. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

The U.S. Federal Reserve started its two day policy meeting today during which it is expected to hold its benchmark interest rate at 0.25 percent and recommit to its policy of buying $85 billion of assets a month to lower borrowing costs as signs mount the economy is losing momentum.

Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, according to the MNI Chicago Report’s business barometer.

The loonie has been little changed in the past month against nine developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has lost 1.6 percent and the U.S. dollar fell 1 percent while the euro has climbed 1.7 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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