Canada Dollar Rises Most Since October 2009 on Fiscal Outlook

Canada’s dollar rose the most in eight months on bets economic growth will fuel demand for the nation’s raw materials and Europe’s debt crisis spurred demand for currencies backed by relatively strong balance sheets.

The Canadian currency, known as the loonie, has appreciated 11.4 percent this year, the best performance among its developed-world counterparts, Bloomberg Correlation-Weighted Indexes show. The nation’s wholesale sales rose 0.3 percent in April, according to a median forecast of 172 economists in a Bloomberg survey before a report on June 17.

“What we’ve seen this week is that there will be austerity programs, there are still vectors of strength in the world,” said Stefane Marion, chief economist at National Bank Financial Inc. in Montreal. “The Canadian dollar has held up really well in a situation where people are worried about a double dip in the economy.”

The Canadian currency rose 2.9 percent to C$1.0322 per U.S. dollar in Toronto, compared with C$1.0629 on June 4, the biggest gain since the five days ended Oct. 9, 2009. It reached C$1.0288 on June 10, the strongest since May 18. One Canadian dollar buys 96.88 U.S. cents.

‘Reserve Currency’

The loonie has risen 1.2 percent since June 1, when the Bank of Canada raised its target interest rate to 0.50 percent from a record low 0.25 percent, the first Group of Seven country to do so since last year’s global recession. Canada will have the lowest net debt-to-output ratio among the G-7 countries, and along with the U.S. will have the fastest economic growth this year, the International Monetary Fund’s April 2010 World Economic Outlook predicted.

Canadian monetary and fiscal policy “continues to suggest the making of a reserve currency,” making it less likely that international investors will sell the nation’s assets during economic shocks, BNP Paribas SA said on June 10.

Global demand for commodities will “force the Bank of Canada to tighten faster than the market is currently pricing in,” BNP analysts wrote in an e-mailed note. “The end benefit for Canada is the rising credibility of the central bank as it correctly anticipated the subprime crisis and presided over a stable banking system.”

The currency has appreciated this year against all but one of its 16 most-traded counterparts, even as crude oil, Canada’s biggest export, declined 6.4 percent and the MSCI World Index of shares dropped 7.5 percent.

‘Take Up the Slack’

While the loonie tends to follow movements in stocks and commodities, correlation studies suggest the currency may be decoupling from its traditional drivers.

Movements in Canada’s currency are 81 percent correlated to the MSCI World Index and 68 percent to crude oil futures contracts, according to Bloomberg 30-day correlation data. That’s down from highs of 82 percent on April 5 and 80 percent on April 27, respectively. A correlation of 100 percent would indicate the instruments move in lock step.

“Canada has proven its ability to outperform both in a period of global market strengths but also in an environment in which risk gets taken off the table,” said Derek Holt, an economist with Bank of Nova Scotia in Toronto.

‘Take Up the Slack’

Canadian employers added 24,700 jobs in May, topping the 15,000 median forecast in a Bloomberg News survey. The country’s unemployment rate was unchanged at 8.1 percent, Statistics Canada said last week in Ottawa. The gain followed a record 108,700 jump in April.

“The Canadian economy is starting to take up the slack that emerged during the downturn,” said David Watt, a senior currency strategist in Toronto at Royal Bank of Canada, the nation’s largest lender. “You look at the economic growth numbers, Canada is going to be if not the top performing G-7 nation this year,” then on par with the U.S.

Government bonds declined. The yield on the two-year note rose 16 basis points, or 0.16 percentage point, to 1.78 percent. Yields on securities maturing in 10 years gained 11 basis points to 3.40 percent.

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