Canadian Dollar Rallies From Two-Month Low on Central-Bank Bets

Canada’s dollar rebounded from almost the weakest level in two months on speculation the Canadian economic recovery is gathering steam and Federal Reserve policy makers will prolong its bond purchases.

Government bonds rose for the first time since Nov. 7 after the Finance Ministry said yesterday it will record a budget surplus of C$3.7 billion ($3.53 billion) in the year starting April 2015, up from C$800 million projected earlier. Oil, Canada’s biggest export, climbed. Janet Yellen, nominee for Fed chairman, said the economy is “far short” of its potential and must improve before the U.S. central bank can slow stimulus.

“It’s hard to find one smoking gun that’s caused the move,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce, said by phone from Toronto of the Canadian currency’s gain. “People may be hedging their bets on tapering not starting in December, and the fiscal news from Canada is supporting loonie strength.”

The loonie, as the Canadian currency is nicknamed for the image of the waterfowl on the C$1 coin, appreciated 0.4 percent to C$1.0457 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0509 yesterday, the weakest level since Sept. 5. One Canadian dollar purchases 95.63 U.S. cents.

‘Key Resistance’

“We’re bumping up against a key resistance level near C$1.05, waiting for the next trigger through the key resistance or backing away from it,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank, said in a phone interview. Resistance is a level on charts where sell orders, in the case for the U.S. dollar, may be clustered.

Canada’s top credit rating and stable outlook were affirmed by Standard & Poor’s, which cited the nation’s predictable policies and a “highly resilient” economy. The AAA grade and a parallel rating from Moody’s Investors Service make Canada the only Group of Seven country with a stable top credit rating from both companies.

The currency of the U.S., Canada’s biggest trade partner, rose against 15 of its 16 most-traded peers over the past month on bets a strengthening American economy will prompt the Fed to taper its $85 billion in monthly bond-buying under the quantitative-easing stimulus strategy. The program has bolstered global risk appetite while tending to depress the greenback. Reports last week showed U.S. payrolls and gross domestic product grew more than forecast.

At their September meeting, Fed policy makers voted unexpectedly to keep the QE program unchanged, a decision they repeated at an Oct. 29-30 session. Economists surveyed by Bloomberg News last week predict the first tapering of bond purchases won’t occur until March.

Yellen Testimony

Yellen, the Fed’s vice chairman, will testify tomorrow at a Senate Banking Committee hearing on her nomination to succeed Chairman Ben S. Bernanke. She said in prepared testimony unemployment is still too high and inflation is “expected’ to remain below the Fed’s goal of 2 percent. She has supported the asset purchases, which some lawmakers are using to justify voting against her.

Crude oil for December delivery rallied as much as 1.6 percent to $94.54 a barrel in New York after closing yesterday at $93.04, the lowest level since May. The Standard & Poor’s GSCI Index of 24 raw materials gained 0.7 percent.

The Canadian 10-year bond’s advance pushed its yield down seven basis points, or 0.07 percentage point, to 2.58 percent. It rose yesterday to 2.66 percent, the highest since Oct. 16. The price of the 1.5 percent debt due in June 2023 increased 54 cents to C$90.94. Thirty-year bond yields decreased five basis points to 3.14 percent.

Bond Auction

The Bank of Canada auctioned C$1.4 billion of 3.5 percent securities today due in December 2045 at an average yield of 3.179 percent. The sale drew C$3.5 billion in bids, for a coverage ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.53. The last sale of the securities, a C$1.4 billion offering on May 22, yielded 2.55 percent and had a coverage ratio of 2.47.

The Bank of Canada won’t increase its overnight lending rate until the first quarter of 2015, according to the median estimate of 15 economists in a Bloomberg News survey conducted after the central bank’s last monetary-policy report on Oct. 23. Economists as recently as Oct. 9 forecast a rate boost in the fourth quarter of 2014.

Central-bank Governor Stephen Poloz’s decision to drop predecessor Mark Carney’s leaning toward higher interest rate has prompted currency strategists to cut their end-of-2014 forecast for the loonie by 3.8 percent in the past month to C$1.06 per U.S. dollar, the biggest reduction among 50 currency pairs, Bloomberg surveys show.

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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