Canadian Dollar Appreciates for Third Month on Rate Outlook

Canada’s dollar gained for a third straight month on speculation the Bank of Canada will raise interest rates to contain inflation before the Federal Reserve.

The loonie, as the currency is nicknamed, reached the strongest level in more than three years against its U.S. counterpart, which fell this week after Fed Chairman Ben S. Bernanke said he was unsure when stimulus would unwind. The Canadian currency weakened earlier against most of its major counterparts as the nation’s economy unexpectedly shrank in February after four months of expansion.

“The Canadian dollar, while lagging certainly commodity peers and lagging Europe, is still outperforming the U.S dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The dollar continues to be a sell into the Fed, past the Fed, and much of that is driven by Bernanke’s dovish comments.”

The loonie appreciated 0.6 percent to 94.51 cents versus the greenback at 5:11 p.m. in Toronto, from 95.06 cents yesterday. It touched 94.46 cents, the strongest since Nov. 12, 2007. One Canadian dollar buys $1.0581.

The yield on June 2011 bankers’ acceptances, a barometer of short-term rate expectations, fell to 1.35 percent, from 1.36 percent yesterday, indicating investors may have tempered their anticipation for higher Canadian policy rates.

Bond Yields

Canadian government bonds advanced, with the yield on the benchmark 10-year security down two basis points, or 0.02 percentage point, to 3.2 percent. The price of the 3.5 percent security maturing in June 2020 increased 19 cents to C$102.33.

The BOC has held its target rate for overnight loans between commercial banks at 1 percent since September, when the rate increased for a third time last year. The central bank will keep its benchmark at that level during the second quarter and boost it to 1.50 percent during the third quarter, according to the median forecast in a Bloomberg News survey.

The Fed left its benchmark interest rate in a range of zero to 0.25 percent on April 27, where it’s been since December 2008, and said it will likely continue reinvesting maturing debt after its $600 billion program of bond buying expires in June.

Output in Canada’s economy fell 0.2 percent to a seasonally adjusted annual rate of C$1.26 trillion ($1.32 trillion) in February, Statistics Canada said. The result was weaker than estimates of all 22 economists in a Bloomberg News survey, which had a median forecast of no change.

Annual Growth Rate

The economy grew 2.9 percent in February from the same month a year earlier, the slowest annual pace of expansion in a year, according to Statistics Canada.

“GDP was a little weaker than expected,” said Blake Jespersen, director of foreign exchange at Bank of Montreal in Toronto. “It’s looking more like September if not later for a rate hike by the Bank of Canada.”

The loonie has fallen 1.5 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, a measure of the 10 developed-nation currencies. The U.S. currency has lost 7.3 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE