Canada’s dollar reached the strongest in 11 weeks after the Bank of Canada kept its main interest rate unchanged and said borrowing costs will increase as the economy recovers.
The loonie, as the currency is nicknamed, rose against all except one of its 16 most-traded peers, the New Zealand dollar, as global stocks and crude oil rallied, boosting demand for riskier assets. The statement accompanying the central bank’s interest-rate decision dropped the word “eventually” to describe the timing of its next move.
“The Bank of Canada produced a very modestly more hawkish statement than expected,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “What they’re indicating is that they’re one step closer to raising interest rates again. You’re starting to see some currency strength there independent of what’s happening throughout the dollar bloc.”
The currency appreciated as much as 1.2 percent to 94.82 cents per U.S. dollar, the most since May 3. It reached 94.46 on April 29, the strongest in more than three years. Canada’s dollar traded at 95.01 cents at 5:01 p.m. in Toronto, from 95.97 cents yesterday. One Canadian dollar buys $1.0525.
All 26 economists in a Bloomberg News survey predicted Bank of Canada Governor Mark Carney would leave the target for overnight loans between commercial banks at 1 percent.
The yield on December 2011 bankers’ acceptances surged 8 basis points after the Bank of Canada statement today, trading at 1.46 percent, from 1.38 percent yesterday. It reached 1.36 percent on June 24, the lowest closing price since the contract started trading in December 2008. Bankers acceptances settle at an average of 18 basis points above the target rate, according to Bloomberg data back going to 1992.
“The market views the Bank of Canada statement as quite hawkish and the Canadian dollar has jumped over half a cent,” Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal’s BMO Capital Markets unit, said via e-mail. “Inflation pressure was cited several times and the market has priced in 70 percent of hike in December now.” BMO expects two interest-rate increases, at the October and December meetings, he said.
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the central bank said in a statement. “Such reduction would need to be carefully considered.”
The central bank will release its monetary policy report at 10:30 a.m. tomorrow, with a press conference by Carney 45 minutes later.
The Bank of Canada may raise its policy rate in September if Canada’s economy continues to grow and European and U.S. policy makers address their debt burdens, according to National Bank of Canada.
“If it was only based on the domestic considerations, the Bank of Canada would raise its rates today, but you cannot look at it in a vacuum,” said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial Group, a unit of the bank, by telephone from Montreal. “You have to look at what’s happening to the Canadian dollar and what’s going on globally.”
Canadian government bonds fell, pushing the yield on benchmark two-year securities nine basis points higher to 1.48 percent. The price of the 2 percent security maturing in August 2013 dropped 19 cents to C$101.03.
Crude oil futures climbed 2.2 percent to $98.05 a barrel on the New York Mercantile Exchange. Oil is Canada’s biggest export. The MSCI World Index of stocks in developed economies gained 1.5 percent.
“Markets are more willing to add risk to their portfolios today,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto.
The loonie appreciated the most versus the Swiss franc among major currencies as investors squared positions before a July 21 meeting of European Union leaders.
“Markets remain nervous ahead of the Thursday emergency meeting,” Sara Yates, a foreign-exchange strategist at Barclays Plc, said by phone from London. “What we’ve run into perhaps is some profit taking in Swiss franc positions. There’s uncertainty about what the outcome of that meeting will be, and the market is nervous ahead of that.”