Canadian Dollar Gains From 10-Week Low on Factory Sales, Yellen

The Canadian dollar strengthened from a 10-week low after manufacturing sales increased to the highest in more than a year and Federal Reserve Chairman-nominee Janet Yellen said yesterday she’ll press on with stimulus that has boosted global risk appetite.

The currency’s gain was tempered by data showing that Canada’s housing market cooled and industrial production in the U.S., the nation’s largest trading partner, unexpectedly declined. Yellen said she’d maintain the Fed’s bond purchases. A measure of New York-area manufacturing dropped. A U.S.-Canadian-dollar volatility gauge slid to a three-week low.

“All else being equal, risk appetite just continues to march higher,” said Adam Button, a currency analyst at forexlive.com, by phone from Montreal. “The main risk was Fed tapering. We dabbled with it the last three weeks in the market, thinking the Fed might taper in December. Now the market’s said there’s about a 10 percent chance we taper in December, and we’re comfortable with that.”

Canada’s currency appreciated 0.2 percent to C$1.0439 per U.S. dollar at 5 p.m. in Toronto. It lost as much as 0.2 percent earlier and gained 0.4 percent on the week. Yesterday, the currency touched C$1.0526, the weakest level since Sept 4. One Canadian dollar buys 95.80 U.S. cents.

The loonie, nicknamed for the image of the waterfowl on the C$1 coin, declined versus eight of its 16 most-traded counterparts tracked by Bloomberg.

Volatility Measure

Implied volatility for one-month options on the U.S. dollar against the loonie fell to 5.16 percent, the lowest intraday level since Oct. 23. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.49 percent.

Futures traders decreased their bets that the Canadian dollar will decline against its U.S. peer, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie versus those on a gain -- so-called net shorts -- was 16,092 on Nov. 12, compared with net shorts of 18,002 a week earlier.

The nation’s benchmark 10-year government bond was little changed, yielding 2.56 percent. The 1.5 percent security maturing in June 2023 slipped 6 cents to C$91.10.

Futures on crude oil, Canada’s largest export, fluctuated, approaching yesterday’s five-month closing low of $92.51 a barrel in New York. They slid 0.9 percent over the past five days in their sixth straight weekly loss. The Standard & Poor’s 500 Index of stocks rose 0.4 percent.

Drivers Shift

Traditional drivers of the Canadian dollar such as U.S. equities and the price of oil are becoming less important as interest-rate spreads between the U.S. and Canada take center stage, according to Bank of America Corp.

The market will see a Fed move in January to begin slowing its asset purchases as the first step toward higher interest rates, while the Bank of Canada stays on hold, Ian Gordon, a foreign-exchange strategist in New York, wrote in a Nov. 15 client note, citing company forecasts. The “relative policy divergence” will be positive for the greenback, he said.

The loonie will remain supported over the longer term as Canada diversifies its export base and new pipelines carrying Canadian oil to the U.S. boost producer profit margins, Gordon wrote. The key Canadian rate is 1 percent, and the U.S. benchmark (FDTR) is zero to 0.25 percent.

Factory Sales

The Canadian dollar gained after data showed the nation’s factory sales climbed in September to the highest since June 2012. They increased 0.6 percent to C$49.9 billion ($47.7 billion), Statistics Canada said.

The currency fluctuated after Canadian existing-home sales fell 3.2 percent in October from the previous month, the biggest drop since August 2012. Unit home sales decreased to 39,235, down from 40,545 in September, the Canadian Real Estate Association said in a statement on its website.

It was the first drop since February, ending a seven-month run that reflected a flurry of purchases as buyers rushed to beat expected mortgage-rate increases. Home prices fell 1.1 percent during the month to C$388,277.

In the U.S., total industrial production fell 0.1 percent in October as output at mines and utilities declined, according to Fed data. The New York Fed’s Empire State report on manufacturing in the region shrank to negative 2.21 this month, compared with a forecast of 5, versus 1.5 in October. Readings less than zero signal contraction.

Currency Performance

The loonie declined 1.7 percent in the past three months against nine developed-nation counterparts tracked by the Bloomberg Correlation Weighted Index. The New Zealand dollar was the biggest gainer, with a 3.2 percent jump, while the U.S. dollar declined 0.3 percent.

Yellen, who’s now Fed vice chairman, told the Senate Banking Committee yesterday at a confirmation hearing she’s committed to promoting a strong recovery of an economy that’s operating well below its potential. The U.S. central bank purchases $85 billion of bonds each month to cap borrowing rates and spur growth.

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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