Loonie Gains to Highest in Almost Three Weeks on Stock Rally

Canada’s dollar climbed to the strongest level in almost three weeks as U.S. stocks advanced and prices for raw materials such as crude oil rose, making currencies linked to global growth more attractive.

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, has gained 6.7 percent this year, according to Bloomberg Correlation-Weighted Currency Indices, the second-best performance among its 10 developed-world counterparts behind the yen. Traders have increased bets that the Bank of Canada will raise interest rates through the rest of the year since a July 9 report showed the nation’s job creation last month increased almost five times as much as economists forecast.

“Risk appetite is better than it was five days ago,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Canada had very strong jobs data on Friday. This is a continuation of that, with expectations for a rate hike at the July 20 Bank of Canada meeting.”

The Canadian currency gained 0.7 percent to C$1.030 per U.S. dollar at 5 p.m. in Toronto, compared with C$1.0372 yesterday. The currency reached C$1.0277, the strongest level since June 23. One Canadian dollar buys 97.09 U.S. cents.

The Standard & Poor’s 500 Index climbed 1.5 percent in its sixth day of gains. Crude oil for August delivery rose 3 percent to $77.18 a barrel. Canada’s currency tends to rise and fall with equities and commodity prices.

Bank of Canada

Traders raised bets the central bank will increase its 0.5 percent target lending rate at its next meeting on July 20. Yields on December 2010 bankers’ acceptances, the most-active contract, jumped 3 basis points, or 0.03 percentage point, to 1.36 percent, the highest this month.

Canada reported its largest merchandise trade deficit in eight months in May. The deficit of C$503 million ($489 million) was the third consecutive shortfall, as imports of machinery and equipment outpaced gains in exports, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News predicted a zero balance, according to the median of 21 estimates.

The loonie may struggle to exceed the C$1.02 to C$1.03 range versus the greenback, Shaun Osborne and Jacqui Douglas, currency strategists at Toronto-Dominion Bank’s TD Securities unit, wrote in a note to clients today.

“A lot of good news is priced into the Canadian dollar,” Osborne and Douglas wrote. The extra yield investors get to hold Canadian two-year debt over U.S. securities is “hugely supportive of the Canadian dollar,” they wrote. “A further widening in spreads may be needed to lift the Canadian dollar significantly from here,” according to the strategists.

Two-Year Bond

The yield on Canada’s two-year bond increased 3 basis points to 1.72 percent. The price of the 2 percent security maturing in September 2012 slid 7 cents to C$100.59.

The two-year bond yielded about 106 basis points over equivalent-maturity U.S. Treasuries. The yield advantage reached 115 basis points on May 12, the most since February 2008.

Canada’s dollar traded on a one-for-one basis with its U.S. counterpart on April 6 for the first time in almost two years, as an accelerating global recovery lifted demand for Canada’s raw materials, which account for about a third of export revenue. Higher bond yields typically make a country’s currency more attractive to investors.

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