Canada Dollar Gains for First Week in 3 on Risk-Appetite Revival

Canada’s dollar strengthened for the first week in three as risk appetite outweighed concern that Europe’s sovereign-debt crisis is worsening, sending crude oil, the nation’s biggest export, and stocks higher.

The currency’s advance versus its U.S. counterpart was capped as commodities and equities reversed gains yesterday after Fitch Ratings downgraded Italy and Spain, underlining the potential for the debt crisis to spread. The Canadian dollar rose 1 percent in the five days ended yesterday. A report next week is forecast to show Canada’s trade deficit widened to C$1 billion ($960 million) in August.

“A bid to equities, a bid to commodities and some downside volatility are all contributing factors to a better performance by the Canadian dollar,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said yesterday in a telephone interview.

The Canadian dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, closed yesterday at C$1.0395 per U.S. dollar in Toronto, from C$1.0503 on Sept. 30. It touched C$1.0658 on Oct. 4, the weakest level since August 2010. One Canadian dollar buys 96.20 U.S. cents.

The currency lost 6.9 percent in September, the most in almost three years, as volatility surged on speculation European officials will fail to contain the region’s debt crisis. It rose yesterday the most on an intraday basis since Aug. 9, 1.3 percent, after Canada and the U.S. reported higher-than-forecast job growth in September.

Commodity Currencies

The loonie performed sixth-best among the U.S. dollar’s 16 most-traded counterparts this week, lagging behind the Brazilian real, Mexico’s peso, South Africa’s rand, and the dollars of Australia and New Zealand. All five nations, like Canada, are commodities exporters.

The Reuters/Jefferies CRB Index of raw materials climbed 1.8 percent this week, its first five-day gain in a month, as global-recession speculation receded amid optimism European leaders will take measures to ease the debt crisis. Raw materials generate about half of Canada’s export revenue.

The European Central Bank said Oct. 6 it will reintroduce year-long loans and resume purchases of covered bonds to encourage lending, and the European Commission was pushing for a coordinated capital injection into banks.

November futures on crude oil hit $84 a barrel, from as low as $74.95, and ended the week up 4.8 percent at $82.98 a barrel in New York. The Standard & Poor’s 500 Index rose 2.1 percent this week after tumbling 14 percent from July through September, the biggest loss since the last quarter of 2008.

Job Gains

Canadian employment rose by 60,900 in September, more than four times the median forecast in a Bloomberg News survey, after a decline of 5,500 in August, Statistics Canada said yesterday in Ottawa. The unemployment rate fell to 7.1 percent, the lowest since December 2008.

“The data out of Canada is better than expected, and the macro community will like that and be interested to buy the Canadian dollar at these levels,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, said in a telephone interview yesterday. “Fair value for Canada is stronger than current levels. On a short-term basis, I would be a very gentle buyer of the Canadian dollar at these levels.”

Payrolls in the U.S., Canada’s biggest trade partner, climbed by 103,000 workers last month, Labor Department data showed yesterday in Washington. The median forecast in a Bloomberg survey called for an increase of 60,000.

The employment data’s impact was countered when Fitch lowered the long-term issuer default ratings of Italy and Spain, citing their vulnerability to the debt crisis. Italy had its ratings cut to A+ from AA-, while Spain was cut to AA- from AA+.

‘Uncertainties That Prevail’

The loonie advanced this week “as a measure of stronger-than-expected economics on both sides of the 49th,” said National Bank’s Spitz, referring to the line of latitude that demarcates part of the Canada-U.S. border. Still, he said, “one payroll number and a lack of any downside headline surprises out of Europe over the last couple of days doesn’t necessarily negate the uncertainties that prevail.”

Options trading showed bearishness on the Canadian currency declined over the course of the week. The premium charged for the right to buy the U.S. dollar versus the Canadian dollar in three months over contracts to sell touched 3.32 percentage points yesterday after reaching a record 4.43 percentage points on Oct. 4, so called risk-reversal rates show.

Volatility in the greenback versus the Canadian dollar reached a two-week low. One-month implied volatility on the currency pair touched 12.8 percent yesterday, the lowest level since Sept. 22. It climbed as high as 16 percent on Oct. 4. The average over the past five years is 11.6 percent.

Bonds Fall

Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Canada’s government bonds fell on the week, pushing the 10-year note’s yield higher by nine basis points, or 0.09 percentage point, to 2.24 percent. The yields touched a record low 1.994 percent on Oct. 4. The price of the 3.25 percent security maturing in June 2021 dropped 81 cents to C$108.72.

Canada’s government bonds have returned 7.3 percent this year, according to a Bank of America Merrill Lynch index.

The nation will auction on Oct. 12 C$3.5 billion of bonds due in March 2017. The previous sale of five-year notes, on July 6, fetched an average yield of 2.31 percent.

The nation’s international merchandise trade gap increased to C$1 billion in August, from C$750 million the month before, according to the median of 20 forecasts compiled by Bloomberg. Statistics Canada is due to release the report on Oct. 13.

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