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Loonie’s First Monthly Gain Since April Reflects Growth Appeal

Canada’s dollar strengthened against its U.S. counterpart in July, the first monthly gain since April, as increases in equities and commodities bolstered the appeal of currencies tied to growth.

“Strong equity and crude in the early part of the week helped boost the loonie,” Michael Leavitt, a Montreal-based institutional-derivatives broker at MF Global Holdings Ltd., said in an e-mail.

The Canadian currency gained after reports showing economic growth slowed in both nations failed to deter speculation the Bank of Canada will continue to raise the target rate for overnight lending. Bank of Canada Governor Mark Carney raised the benchmark interest rate on July 20 by a quarter-percentage point for a second month and may raise rates again in September.

The currency, nicknamed the loonie, appreciated 3.2 percent to C$1.0279 per U.S. dollar yesterday in Toronto, from C$1.0639 on June 30. It fell gained 0.6 percent for the week and 2.5 percent this year. One Canadian dollar purchases 97.28 cents.

“The equity markets globally have been outperformers this month,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “If market volatility starts to abate that will likely inspire more moves into risk currencies like Canada.”

Stocks, Commodities

The MSCI World Index of equities in 24 developed markets rose in July, the first time since March, by 8 percent. The Standard & Poor’s 500 Index climbed 6.9 percent.

Crude oil for September delivery gained 4.4 percent to $78.95 a barrel in July. Copper futures rose 12 percent to $3.31 a pound, the best performance since August.

Canada’s gross domestic product expanded 0.1 percent in May after being unchanged the month before, with mining and oil leading increased goods production, while wholesale and real estate activity declined, Statistics Canada said yesterday in Ottawa. Economists surveyed by Bloomberg News predicted a 0.2 percent gain, based on the median of 22 estimates.

Growth in the U.S. slowed to a 2.4 percent annual rate in the second quarter, less than forecast, reflecting a larger trade deficit and reduced consumer spending. The increase in gross domestic product follows an upwardly revised 3.7 percent pace in the first quarter, according to figures from the Commerce Department released yesterday. Business investment climbed at the fastest rate since 1997.

Job Growth

Canadian employers added a net 15,000 jobs in July, according to a Bloomberg survey before the Statistics Canada report Aug. 6. Employment rose by 93,200 in June.

“The Canadian dollar will continue to benefit from better-than-south-of-the-border numbers when looking at the recent strong domestic employment numbers and tame inflation,” said Leavitt, of MF Global Holdings. “The Canadian dollar should continue to trend towards parity.”

The loonie last traded on a one-for-one basis with its U.S. counterpart on April 6 for the first time in almost two years. The currency rose to par with the greenback in September 2007 for the first time in three decades amid booming demand for raw materials.

“The markets are pricing accordingly with a September rate hike,” Spitz said. “Unless there’s a material downturn in between now and the meeting, I think the market has it right.”

Governor Carney raised the target rate for overnight loans between commercial banks to 0.75 percent on July 20 and said further action will be “weighed carefully against domestic and global economic developments.”

Central Bank Stance

The Bank of Canada overnight lending rate will increase 25 basis points to 1 percent in the third quarter, according to the median forecast of economists surveyed by Bloomberg News.

Canadian government bonds rose this week, with the benchmark 10-year note’s yield falling 11 basis points to 3.12 percent, from 3.23 percent on July 23. The price of the 3.5 percent security maturing in June 2020 increased 94 cents to C$103.24.

Foreign investors bought a record C$11.5 billion of federal government securities in May, almost double the previous record of C$6.75 billion set in January, Statistics Canada reported July 19. Demand for Canadian bonds has increased on signs the country was exiting a global recession faster than other Group of Seven countries and that Canada’s debt burden will be lower.

Canada will auction C$3.2 billion ($3.1 billion) of 3-year bonds on Aug. 4, according to the central bank’s website. The 2.5 percent securities mature in September 2013.

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