Canadian Dollar Advances as Economic Gains Prompt Rate-Rise Bets

The Canadian dollar rose to the strongest level in a month against its U.S. peer as investors bet a strengthening economy will convince the Bank of Canada to raise its benchmark interest rate.

The currency gained for a second week versus the greenback as volatility in global foreign-exchange markets reached the highest in a year amid speculation on when the Federal Reserve will start tapering monetary stimulus. Canada posted its strongest job gains in more than a decade last month and home construction rose the most in 13 months, driving expectations to the highest in more than a year the Bank of Canada will raise rates. Oil rose to a nine-month high.

“The market had been bearishly positioned, we saw some better data and I think the market is taking stock again, taking a fresh look at the Canadian dollar,” Jane Foley, chief currency strategist at Rabobank International, said by phone from London. “We’ll probably lack confidence until we see much clearer signs of a pickup in U.S. growth, but nevertheless, Canada is proving that it’s still holding some strong cards.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.3 percent this week to C$1.0170 per U.S. dollar in Toronto after gaining 1.7 percent the week before. One loonie buys 98.33 U.S. cents.

Bonds Rise

Canada’s 10-year benchmark government bonds rose, with yields falling two basis points, or 0.02 percentage point, to 2.12 percent, after reaching 2.21 percent June 21, the highest in 15 months. The 1.5 percent security maturing in June 2023 gained 23 cents to C$94.48.

Futures on crude oil, Canada’s largest export, gained 1.9 percent to $97.88 per barrel, after touching $98.25, its highest September. The discount Canada faces for its oil compared to U.S. benchmarks widened to $10.25 per barrel after touching $9.25, its narrowest in nine months on June 12.

The JPMorgan G7 Volatility Index touched reached 11.2 percent, its highest since June 2012.

Futures traders decreased their bets that the Canadian dollar will decline against the greenback, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the loonie compared with those on a gain -- so-called net shorts -- was 35,907 on June 11, compared with net shorts of 39,776 a week earlier.

Economic Data

“We had that big employment number last week, and early this week we kind of thought, well, that’s going to dissipate and that’ll be it, but it’s kind of held on to those gains,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce, said by phone from Toronto. “Canada’s benefiting from the good news from the U.S. -- it’s own data has not disproved the big employment number yet -- so we’ve been able to hold on.”

U.S. retail sales rose 0.6 percent, the biggest increase in three months, following a 0.1 percent gain in April, Commerce Department figures showed June 13. The median forecast of 83 economists surveyed by Bloomberg called for a 0.4 percent advance.

In Canada, construction began on 200,178 homes at a seasonally adjusted annual pace in May, up 13.8 percent from April and the highest level since November, Canada Mortgage & Housing Corp. reported June 10.

Canadian manufacturing sales dropped 2.4 percent to C$48.2 billion ($47.4 billion), Statistics Canada said June 14, while inventories rose to the highest in records dating to 1992. Economists surveyed by Bloomberg forecast sales would rise 0.3 percent.

‘Uneven’ Recovery

“We have had a string of surprisingly strong data,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS), said by phone from Toronto yesterday. The weak factory-sales report “just highlights the data is still quite uneven as the recovery is still quite uneven.”

The rate for the one-year forward overnight index swap, or OIS, rose to the highest level since May 2012, touching 1.42 percent on June 10, or 42 basis points more than the Bank of Canada’s target rate. The measure, which shows the market’s expectation for the one-year average central-bank rate beginning in one year’s time, was predicting a rate cut last June.

The Bank of Canada, whose key interest rate of 1 percent is the highest among the Group of Seven nations, is the only central bank among them with a leaning, or bias, toward higher rates. New central-bank Governor Stephen Poloz reiterated that stance in his first public comments on June 6. He will give his first speech as governor on June 19 in Oakville, Ontario.

Fed Transparency

Fed policy makers next meet on June 18-19 after Chairman Ben S. Bernanke said on May 22 the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage-backed securities, known as quantitative easing, if the employment outlook shows sustainable improvement. Stimulus tends to debase the currency.

A Bloomberg survey of 59 economists on June 7 estimated the central bank will reduce its buying to $65 billion a month at its Oct. 29-30 meeting.

The Fed’s “transparency isn’t actually working terribly well -- it’s actually engendering market volatility,” Alan Ruskin, global head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, said yesterday on Bloomberg Television. “We want to know a lot in terms of clarity -- what are the data parameters behind this? When you taper, how do you taper?”

The Canadian dollar was the second-worst performer in the past week among a basket of 10 developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The loonie dropped 1 percent, trailing only the U.S. dollar’s 1.3 percent decline. The yen added 2.8 percent to pace gainers.

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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