Canada’s Currency Gains Versus Peers Amid Fed Bets

(Corrects date of economic data release in 13th paragraph of story originally published Nov. 20.)

The Canadian dollar rose versus most major peers after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank won’t reduce the stimulus that’s spurred global risk appetite without a “preponderance of data” showing improvement in the economy of Canada’s biggest trade partner.

The currency remained higher as Bank of Canada Governor Stephen Poloz told Canadian lawmakers their nation’s economy still needs stimulus. The greenback narrowed its loss after minutes of the Fed’s October meeting showed policy makers said they might reduce bond purchases “in coming months” as the economy improves. Bernanke said yesterday in a speech the Fed will probably keep interest rates low long after ending monthly bond purchases.

“The Canadian dollar has kept pace with the U.S. dollar today, and that’s because the Fed was optimistic about the U.S. economy,” Adam Button, a currency analyst at forexlive.com, said by phone from Toronto. “Better growth in the U.S. will spill across the border to Canada.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, gained 0.2 percent to C$1.0453 per U.S. dollar at 5 p.m. in Toronto. It strengthened as much as 0.3 percent, the most since Nov. 13. The currency has traded this month between C$1.0526 and C$1.0398. One Canadian dollar buys 95.67 U.S. cents.

Canada’s currency rose against all of its 16 most-traded counterparts tracked by Bloomberg except South Africa’s rand.

Canadian Bonds

Benchmark 10-year Canadian-government bonds dropped, pushing yields up eight basis points, or 0.08 percentage point, to 2.64 percent, the highest in a week. The price of the 1.5 percent security maturing in June 2023 lost 59 cents to C$90.53.

The Bank of Canada sold C$3.3 billion ($3.2 billion) of two-year notes to stronger-than-average demand. The debt due in February 2016 drew an average yield of 1.146 percent and attracted bids for 2.82 times the amount offered. The past five auctions yielded an average of 1.247 percent, and the average coverage ratio was 2.69 times. The last sale of two-year notes, on Oct. 16, yielded 1.28 percent and had a 2.80 coverage ratio.

Current two-year note yields declined one basis point to 1.12 percent.

The difference in yields between Canadian and U.S. two-year bonds, which gauges the central bank’s policy rate, widened to 85 basis points, the most in almost a month, reflecting a faster rise in Canadian yields.

Appropriate Stimulus

The Bank of Canada’s Poloz, testifying in Ottawa, told the Senate Committee on Banking, Trade and Commerce the amount of monetary stimulus now in place in the Canadian economy remains appropriate, reiterating comments he made last month. He said the outlook for the economy is “roughly the same” from October, according to the text of his remarks posted on the central bank’s website.

At its Oct. 23 meeting, the central bank dropped language in place for more than a year about the need to raise interest rates, citing low inflation.

The lower forecast for inflation “was the key takeaway from the October meeting,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank, said by telephone from Toronto. “The risks tied to the rate outlook are more neutral, and that fits with dropping the tightening bias.”

The central bank has held its benchmark interest rate at 1 percent since 2010 to support the economy.

Consumer Prices

Canadian consumer prices rose 0.8 percent in October from a year earlier, trailing a 1.1 percent gain the previous month, economists in a Bloomberg survey forecast before the government issues the data on Nov. 22.

The U.S. consumer-price index dropped 0.1 percent in October, after a 0.2 percent gain the prior month, a Labor Department report showed today in Washington. The median forecast of 85 economists surveyed by Bloomberg called for no change. Excluding volatile food and fuel, the so-called core measure rose 0.1 percent.

The U.S. dollar extended gains after the Fed released minutes of its Oct. 29-30 meeting. The central bank buys $85 billion of bonds a month to push down long-term yields and spur economic growth. The purchases tend to debase the greenback as they spur risk appetite.

Policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s meeting.

‘Nothing New’

“There’s been a lot of water under the bridge since the meeting,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign exchange dealer, said by phone from Toronto. “There’s nothing new under the sun today. Look to the New Year for any tapering.”

Four of five investors expect the U.S. central bank to delay a decision to start slowing the purchases until March 2014 or later, with just 5 percent looking for a move next month, according to the latest Bloomberg Global Poll. Only one in 20 said reductions will begin at the Fed’s December meeting, according to the poll yesterday of investors, traders and analysts who are Bloomberg subscribers.

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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