Canada Dollar Touches Highest in Week on China Economic Reforms

The Canadian dollar rose to the strongest level in more than a week as the outlook for the nation’s commodity exports improved with China’s pledge to expand economic freedoms.

The currency reached its high of the day against the U.S. dollar after a report showed total foreign investment in Canadian securities increased to the highest level in five months. Risk appetite gained after China’s leaders vowed to allow more private investment in state-controlled industries and expand farmers’ land rights as part of the biggest package of economic reforms since the 1990s.

“The decision that came out of China was generally viewed as positive for riskier assets, and that of course applies to the loonie as well,” David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto.

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, appreciated as much as 0.2 percent to C$1.0415 per U.S. dollar, the strongest since Nov. 7, before trading at C$1.0429 at 5 p.m. in Toronto, up 0.1 percent. One Canadian dollar buys 95.89 U.S. cents.

Gains were limited before data this week forecast to show inflation slowed. Bank of Canada Governor Stephen Poloz’s testimony Nov. 20 to a Senate Committee on Banking, Trade and Commerce may reiterate his concern that consumer prices are stagnating, which prompted him to undo his predecessor’s stance toward higher interest rates on Oct. 23.

‘Negative Factors’

“The outlook for this week in Canada is one where we’re reminded of the negative factors weighing on the Canadian dollar, namely CPI and Poloz,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto. “Those two events could take away strength.”

The nation’s consumer-price index rose 0.9 percent last month from a year earlier, trailing September’s 1.1 percent, economists in a Bloomberg survey forecast before the data are released on Nov. 22. The Bank of Canada’s target range for inflation is 1 percent to 3 percent.

Implied volatility for one-month options on the U.S. dollar against its Canadian counterpart fell to 5.15 percent, the lowest intraday level since Oct. 23. The average this year is 6.48 percent. The measure is used to set option prices and gauge the expected pace of currency swings. The average for 2013 is 6.48 percent.

Risk Reversal

The cost to insure against declines in the Canadian dollar against its U.S. peer also dropped to the lowest since Oct. 23. The three-month so-called 25-delta risk-reversal rate reached 1.06 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite. The 2103 average is 1.26 percent.

Canada’s government bonds rose, pushing yields on benchmark 10-year securities down four basis points, or 0.04 percentage point, to 2.52 percent, the lowest since Nov. 8. The 1.5 percent security maturing in June 2023 gained 29 cents to C$91.39.

Economists reduced their Canadian bond-yield forecasts by the most in seven months after the nation’s central bank joined global counterparts Oct. 23 in renewing efforts to spur growth amid sluggish inflation. Benchmark 10-year bonds will yield 3.06 percent by October 2014, according to the median of 19 forecasts in a Bloomberg News survey taken between Nov. 8 and Nov. 13.

In the Oct. 23 policy statement after he left leave the benchmark interest rate unchanged at 1 percent, Poloz dropped language in place for more than a year about the need to raise interest rates, citing low inflation.

‘Forward Guidance’

Doyle of Macquarie Capital said he expects Poloz’s testimony to highlight the need for accommodative monetary policy to bring the economy back to full output by the end of 2015. Slack will persist until that time on lagging exports, according to central bank forecasts, which put third-quarter growth at a 1.8 percent pace.

“They’re working hard to make sure stimulus is in place, but also they’re working to make sure that financial imbalances don’t build up to the extremes, so they’re wary of providing too much stimulus by cutting rates,” Doyle said. “There are arguments against them moving either way, and the solution is to use a forward-guidance tool to message that rates are going to remain low for some time.”

Foreign investors offloaded C$2.8 billion ($2.7 billion) of Canadian bonds in September, led by a C$3.73 billion drop in holdings of federal-government securities, Statistics Canada reported today. The decline was led by retirements, data showed.

The decrease in bond-buying was offset by purchases of Canadian equities by foreigners. Non-resident investors acquired C$10.79 billion of Canadian stocks after selling C$2.19 billion a month earlier, the statistics agency reported. Total foreign investment in Canadian securities increased to C$8.4 billion, the most since April.

U.S. Stimulus

The U.S. dollar fell against most major peers as Federal Reserve Bank of New York President William C. Dudley said economic growth isn’t strong enough for monetary stimulus to be reduced. Dudley said in a speech in Flushing, New York, he’s “getting more hopeful” the economy is gaining strength.

Fed Chairman-nominee Janet Yellen underscored to U.S. lawmakers Nov. 14 at a confirmation hearing her commitment to strengthening the economy before slowing the central bank’s $85 billion in monthly bond-buying. The purchases, which have spurred investor risk appetite worldwide, tend to debase the U.S. currency.

The Standard & Poor’s 500 (SPX) Index of U.S. equities rose above 1,800 for the first time before falling 0.4 percent amid concern equities gained too much, too fast. The MSCI World Index of developed-nation stocks reached the highest since December 2007.

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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