Canada Dollar Rises to 3-Month High as Fed Refrains From Taper

Canada’s dollar rose to a three-month high after the U.S. Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond purchases and will keep pumping money into the economy to boost growth.

The central bank left unchanged its guidance that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the inflation outlook is no higher than 2.5 percent. The currency pared earlier losses versus its U.S. peer after Bank of Canada Governor Stephen Poloz said in a Vancouver speech that growing confidence has brought the country near a “tipping point” for companies to boost investment. Oil and stocks climbed.

“We were expecting $10 billion in U.S. Treasuries, and obviously we got nothing,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc., said by phone from London. “It’s very positive for all types of risky assets.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, ended 0.7 percent higher at C$1.0220 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0202, the strongest since June 19. One loonie buys 97.85 U.S. cents.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said at the conclusion of a two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

Bond Auction

The Bank of Canada auctioned C$3.3 billion ($3.2 billion) of notes due November 2015 at an average yield of 1.303 percent. The securities are the final re-opening of the issue, which will assume benchmark status, economists at the RBC Capital Markets unit of Royal Bank of Canada wrote in a note today. The auction drew orders for C$8.49 billion of bonds, for a coverage ratio of 2.57 times. That compares to 2.84 times more demand in the last sale of the securities Aug. 21, which yielded 1.27 percent.

Canada’s benchmark 10-year government bonds rose, pushing yields down nine basis points, or 0.09 percentage point, to 2.68 percent. The price of the 1.5 percent securities maturing in June 2023 gained 70 cents to C$89.98 in Toronto.

Futures on crude oil, the nation’s largest export, climbed 2.7 percent to $108.22 a barrel in New York, the biggest jump on a closing basis since Aug. 27. The Standard & Poor’s 500 Index of stocks rose 1.2 percent.

‘Expanding Capacity’

“Evidence suggests we are now close to the tipping point from improving confidence into expanding capacity,” Poloz said in the text of a speech to the Vancouver Board of Trade. An expected strengthening in exports will bolster confidence and lead to new capacity-building investment, reversing a trend of low capital spending in industries outside of resources, Poloz said.

“I don’t think the appreciation we’ve seen will be sustained,” Nomura’s St-Arnaud said. “The rebalancing of growth in Canada towards business investment may be delayed by a quarter or two.”

Canada’s economic growth won’t accelerate this year, expanding at the 1.7 percent rate it posted in 2012, according to a Bloomberg economic survey. The U.S. will pull ahead next year, gaining 2.7 percent and 3 percent in 2015, while Canada grows 2.3 percent and 2.7 percent, the surveys estimate.

Rate Forecasts

The Bank of Canada has cautioned for more than a year that its next move will be to raise interest rates as a quickening recovery takes up slack in the economy and lifts inflation. The country should expect “a gradual normalization of policy interest rates,” Poloz said Sept. 4.

Economists predict the central bank will raise its policy rate to 1.5 percent by the end of 2014, from 1 percent now, according to the median of 19 forecasts in a Bloomberg News survey conducted this month.

“The market has been quite excited recently that central banks could be hiking in 2014,” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “Downward revisions of growth have tempered that and diluted the loonie’s rise.”

The three-month so-called 25-delta risk-reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, rose to as high as 1.35 percent, the highest in almost two weeks, before falling to a seven-week low of 1.21 percent. The measure rose to 1.64 percent on Aug. 23, the highest level on a closing basis since July 2, and hit a low of 0.79 percent on Jan. 14. The 2013 average is 1.26 percent.

The loonie fell 3.2 percent in the past year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, making it the third-worst performer. The yen lost 20 percent, and the Australian dollar slipped 8.3 percent. The U.S. dollar rose 2.1 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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