Canadian Dollar Rises in Longest Weekly Rally Since 2005

The Canadian dollar extended its rally against the yen for a 10th week in its longest winning streak in almost seven years as a rally in U.S. stocks encouraged demand for higher-risk assets.

Canada’s currency was the best performer during the past month among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes on speculation the economic recovery of the U.S., the nation’s biggest trading partner, is firming. Canadian government 10-year yields rose to a four-month high before a report next week forecast to show consumer prices increased at faster annual rate.

“What we have seen in terms of data for the U.S. has been relatively positive and providing support for the Canadian dollar,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Securities Inc. in New York.

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, appreciated 1.1 percent to 84.13 yen yesterday, from 83.25 on March 9. The 10 weeks of gains is the longest span since one of the same length that ended in July 2005. The loonie declined 0.1 percent to 99.17 cents per U.S. dollar.

Implied volatility for one-month options on the Canadian dollar versus the greenback decreased this week. It touched 6.90 percent yesterday after reaching 6.89 percent on Feb. 24, the lowest level on record. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings. It averaged 9.99 during the past year.

Volatility Impact

Lower volatility makes investments in currencies with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits. Canada’s target lending rate is 1 percent, compared with the Federal Reserve’s range of zero to 0.25 percent.

Government bonds fell, pushing the yield on the benchmark 10-year security up 23 basis points, or 0.23 percentage point, to 2.24 percent, the biggest weekly increase since July. The yield touched 2.30 percent, the highest level since Oct. 31. The price of the 3.25 percent security maturing in June 2021 fell C$2.06 to trade at C$108.36.

Canada will auction C$1.4 billion ($1.4 billion) of 30-year bonds on March 21, according to a statement on the central bank’s website. The 3.5 percent securities are due to mature in December 2045.

Foreign investors were net sellers of Canadian securities during January, marking the first decline in holdings in seven months, government figures showed yesterday. Investors abroad slowed purchases of Canadian bonds to C$1.87 billion, following an accumulation of C$3.10 billion in December.

U.S. Stock Rally

The Standard & Poor’s 500 Index rose for a fifth consecutive week after the Federal Reserve raised its assessment of the U.S. economy and refrained from new actions to lower borrowing costs.

The index advanced 2.4 percent from a week earlier, reaching its highest level in almost four years. The S&P/TSX Composite Index was little changed for the week. Futures on crude oil, Canada’s biggest export, were little changed at $107.30 a barrel.

“The Canadian dollar is quite sensitive to moves in the S&P 500,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co., in a telephone interview March 13. The currency is “much more sensitive to the S&P than most other drivers.”

The loonie has a 120-day correlation coefficient of 0.85 with the U.S. equity index. A reading of one would mean the two move in lockstep.

Proxy for Growth

The Canadian currency, which tends to trade as a proxy for global economic growth on speculation its economy will benefit from demand for raw materials, has appreciated 1 percent in the past month, the most among 10 correlation-weighted peers. The U.S. dollar has advanced 0.4 percent.

“I’m a Canadian dollar bull,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, in a telephone interview March 14. “I would still rather be long the Canadian dollar than almost anything else. Expect the risk rally to continue for a bit longer.”

Canada’s consumer prices rose at a 2.7 percent annual rate last month after a 2.5 percent increase in January, according to the median forecast of 21 economists in a Bloomberg News survey before the March 23 report from Statistics Canada. Economists project that the gauge of inflation will rise 0.4 percent from the previous month.

“February is usually a month for high inflation, so the likelihood of having a strong number is quite high,” according to St-Arnaud or Nomura Securities.

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