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Loonie Climbs First Week in Three on Stock Gains, Jobs Growth

Canada’s currency posted its first advance in three weeks amid gains in equities and speculation the Bank of Canada will raise interest rates after a report showed job growth beat economists’ expectations fivefold.

The Canadian currency gained 2.8 percent since July 2 as crude oil, Canada’s largest export, advanced 5.5 percent. Trading in derivatives showed a higher probability of a quarter-percentage point rise in the central bank’s policy rate on July 20. The Standard & Poor’s 500 Index rallied 5.4 percent in its largest weekly gain in a year.

“It’s difficult to find any technical or fundamental reason to not own the currency,” Dean Popplewell, an analyst at online currency-trading firm Oanda Corp. in Toronto, said in an e-mail, “whether it’s growth, the Bank of Canada’s attempt to normalize rates somewhat or as a safer-haven proxy.” Popplewell predicted the currency will exceed parity during the next month.

Canada’s dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, appreciated to C$1.0337 per U.S. dollar yesterday in Toronto, the strongest closing level since June 22. It was C$1.0624 on July 2. One Canadian dollar buys 96.74 U.S. cents.

The loonie advanced 2.1 percent to C$1.3069 per euro, and rose 3.8 percent to 85.72 yen. The Canadian currency was the third-best performer among its 16 most-traded counterparts after the dollars of Australia and New Zealand.

‘Hit Hard’

“Commodity currencies got hit very hard as the expectation for U.S. and global growth was being recalibrated downwards,” Camilla Sutton, director of currency strategy at Bank of Nova Scotia’s Scotia Capital unit, said by phone from Toronto. “The market has priced that in and we’re still seeing strong numbers from Canada. There’s still a strong overall case for a long Canadian-dollar position.” A long position is a bet a currency will rise.

Canadian government bonds slumped this week on reduced demand for the safest and most liquid assets. The 10-year security’s yield climbed 13 basis points, the most this year, to 3.23 percent. It touched 3.26 percent yesterday, the highest level since June 23. The price of the 3.5 percent security maturing in June 2020 fell C$1.10 to C$102.30.

Employment rose by 93,200 jobs in June, following gains of 24,700 in May and April’s record 108,700, Statistics Canada said yesterday in Ottawa. The jobless rate fell to 7.9 percent, the lowest since January 2009, from 8.1 percent. Economists surveyed by Bloomberg predicted 20,000 new jobs and an unemployment rate of 8.1 percent, according to the median of 23 estimates.

“Once again, Statistics Canada has blown everyone out of the water,” Popplewell said.

IMF View

The job market has been one of the strongest parts of a Canadian recovery the International Monetary Fund says will lead advanced economies this year. The Bank of Canada raised its key lending rate from a record low 0.25 percent June 1 after the economy grew at a 6.1 percent annualized pace in the first quarter. The bank said future moves depend on the balance of domestic growth and an uneven global recovery.

Canada’s unexpectedly large job growth in June means the country is the first in the Group of Seven to return employment to levels last seen in October 2008 when the global slump began.

“What we see is an economy that is no longer in need of an emergency setting for monetary policy,” said David Tulk, senior macro strategist at Toronto Dominion Bank in Toronto. “Expect the Bank of Canada to take rates higher in two weeks.”

Central Bank

Traders raised bets the Bank of Canada, led by Governor Mark Carney, will tighten monetary policy at the next meeting on July 20. Yields on December 2010 bankers’ acceptances, the most- active contract, jumped 10 basis points, or 0.01 percentage points, to 1.34 percent, the highest in two weeks.

So-called Bax contracts have settled an average of about 20 basis points above the central bank’s overnight target since 1992, Bloomberg data show. Hedge funds and money managers use the contracts to hedge against interest-rate exposure and make bets. The yield falls as the price rises.

The chance the Bank of Canada will raise its interest rate to 0.75 percent at its July 20 decision rose to 96 percent yesterday from 76 percent Thursday, according to a Credit Suisse Group AG calculation derived from overnight index swaps.

“A lot of good news is priced into the Canadian dollar,” said Shaun Osborne, chief currency strategist at TD Securities Inc.

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