Canada Dollar Rises for 3rd Day as Fed Considers Stimulus Cuts

The Canadian dollar rose for a third day as Federal Reserve meeting minutes showed divisions among policy makers about the timeframe for withdrawing monetary stimulus known as quantitative easing.

The currency had fallen to an almost two-year low after Fed Chairman Ben S. Bernanke said after the June 19 meeting the central bank may trim its bond-buying this year and halt it around mid-2014 if economic performance tracks its forecast. Crude oil, Canada’s biggest export, reached its highest level in 15 months amid declining stockpiles. The Bank of Canada sold five-year notes.

“Talk of wrapping up QE by the end of the year has led to a quick turnaround in the U.S. dollar” against its Canadian counterpart, Adam Button, a currency analyst at Forexlive.com in Montreal, said in a telephone interview.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.6 percent to C$1.0465 per U.S. dollar at 5 p.m. in Toronto, after rising to as high as C$1.0447. The currency fell to C$1.0609 on July 5, the weakest level since October 2011. One loonie buys 95.56 U.S. cents.

Minutes of the last meeting of the Federal Open Market Committee released today said “about half” of 19 participants indicated “it likely would be appropriate to end asset purchases late this year.” “Many other” FOMC members said it would be appropriate to continue purchases into 2014, the minutes said, while “a few” wanted to slow or stop the purchases at the June meeting.

Fed Message

“Once the information gets absorbed, the takeaway will be more hawkish and the market will reverse itself,” Jack Spitz, Toronto-based managing director of foreign exchange at National Bank of Canada, said in a phone interview following the release of the minutes.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart fell to 8 percent from 8.23 percent the previous day. Implied volatility, which traders quote and use to set option prices and signals the expected pace of currency swings, reached the highest in a year on June 24 at 8.87 percent.

Crude oil futures added 2.6 percent to $106.17 a barrel in New York, after reaching the highest level since March 2012. “Oil has been a bit of a tailwind for the Canadian dollar,” Button said. “That’s coming back on traders’ radars.”

Bonds Fall

Canada’s benchmark 10-year bonds fell, pushing yields two basis points higher to 2.49 percent. The 1.5 percent security maturing in June 2023 dropped 13 cents to C$91.39.

The Bank of Canada sold C$3.4 billion ($3.2 billion) of 1.25 percent notes maturing in September 2018.

The securities fetched an average yield of 1.884 percent and had a coverage ratio -- the amount bid relative to the amount sold -- of 2.5. The previous five-year auction on May 8 had a bid-to-cover ratio of 2.7, according to Bank of Canada’s website.

The Canadian dollar has risen 1 percent in the past three months against nine developed nations currencies tracked by the Bloomberg Correlation Weighted Index, helped by the gains in the price of its biggest export, oil. The U.S. dollar has gained 5 percent.

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

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

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