Canadian Dollar Appreciates as Equities Climb

Canada’s dollar strengthened to almost parity with its U.S. counterpart as stocks advanced before the Federal Reserve concludes its meeting today with a policy statement.

The currency rose to the highest since May yesterday, capping its second monthly advance on speculation the Fed and the European Central Bank will extend measures to stimulate economic growth amid evidence the global recovery is stalling. The so-called loonie rose to the highest since March against the U.K. pound.

“We’re just sitting here waiting for the outcome of two pretty important meetings over the next 24 hours,” Shaun Osborne, chief foreign-exchange strategist at Toronto-Dominion Bank’s TD Securities unit, said by phone from Toronto. “The Fed later on today and the ECB tomorrow. They’re the two elephants in the trading room.”

Canada’s currency strengthened as much as 0.3 percent to C$1.0004 per U.S. dollar, approaching the C$1.0003 it reached yesterday, the strongest level since May 15. It traded at C$1.0018 at 1:07 p.m. in Toronto, up 0.2 percent. One Canadian dollar buys 99.87 cents. It climbed for a fourth day to C$1.5627 against the pound.

Bonds Fall

Government bonds fell for the first time in three days, sending the benchmark 10-year yield up five basis points, or 0.05 percentage point, to 1.73 percent. The price of the 2.75 percent securities due in June 2022 dropped 47 cents to C$109.25.

Concern that Europe’s debt crisis is widening, hampering economic growth in China and the U.S., the world’s two largest economies, has led a flight to the safest of assets. Government bond yields reached 1.34 percent on June 1, the lowest since at least 1989, according to the Bank of America Merrill Lynch Canadian Governments Index, which tracks 36 bonds with an average maturity of 8.74 years and about C$361 billion outstanding. Yields ended yesterday at 1.49 percent.

Canada sold C$3.3 billion ($3.3 billion) of two-year bonds today in Ottawa. The 1 percent bonds maturing in November 2014 fetched an average yield of 1.147 percent.

The coverage ratio, the amount bid relative to the amount on offer, was 2.55 times. That compares with an average yield of 1.114 percent and a coverage ratio of 2.41 times at the previous two-year auction on June 20.

European Influence

The Canadian dollar and the euro pared gains after Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its mandate. Tomorrow’s interest-rate decision is the first since President Mario Draghi pledged to do whatever it takes to defend the single currency.

The Fed bought $2.3 trillion of securities in two rounds of asset purchases from 2008 to 2011 in a bid to spur growth, and it has said its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014.

While the Fed refrained from introducing a third round of asset purchases known as quantitative easing at its June meeting, Chairman Ben S. Bernanke indicated it’s an option.

Rather than increase asset purchases this week, the Fed is more likely to extend its pledge to hold its main interest rate near zero beyond the current horizon of late 2014. Twenty-six percent of economists expect the central bank to announce a later date, while 88 percent said the bank will refrain from starting new purchases at today’s meeting.

“The risk is that expectations have got a bit inflated,” Adam Cole, global head of foreign-exchange strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from London. “Selling rallies in risk is the right way to be positioned.”

The Standard & Poor’s 500 Index rose 0.3 percent. Crude oil futures rose 1.5 percent to $89.25 a barrel in New York. Crude is Canada’s largest export.

“Stocks are still by far the best indicator for dollar-Canada,” said RBC’s Cole. “The Canadian dollar is almost 90 percent correlated to changes in the S&P 500.”

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