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Canadian Dollar Strengthens as BOC Says It May Boost Rate

Canada’s dollar rallied and government bonds fell after Bank of Canada policy makers said higher borrowing costs “may become appropriate” because economic growth and inflation will be faster than it forecast.

The loonie, as the currency is nicknamed, strengthened the most since November after the central bank said kept its main interest rate at 1 percent, extending the longest pause since the 1950s, as predicted by all 25 economists in a Bloomberg survey. The yield on the September 2012 bankers’ acceptances, futures contracts that serve as a barometer of short-term rate projections, rose to the highest since August.

“We’re still constructive on Canada relative to a lot of the other G-10 currencies, primarily because domestic demand looks to be a pretty solid growth engine for the country,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc, by phone from Stamford, Connecticut. “Europe is still not solved, but things are better than they were back in January this year. We think that bodes well for the loonie.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, rose 0.9 percent to 99.02 cents per U.S. dollar at 5 p.m. in Toronto. It rose the most since Nov. 30 and reached the strongest level since March 20. One Canadian dollar purchases $1.0099.

The currency depreciated to C$1.0053 on April 11, the weakest since Jan. 31.

Canada Forecast

RBS’s Kim predicted the Canadian dollar will strengthen to 96 cents against the greenback and C$1.23 versus the euro by the end of June. It rose 1 percent to C$1.2999 today.

The loonie strengthened earlier after Spain sold more than its maximum target at a bill auction, reducing European sovereign-debt-crisis concern and boosting demand for riskier assets.

Shorter-term government bonds fell, pushing benchmark two-year yields as much as 14 basis points higher, the most on an intraday basis since Aug. 5, to 1.37 percent. The price of the 0.75 percent note due in May 2014 dropped 19 cents to C$98.85.

The yield on the September 2012 bankers’ acceptances, futures contracts, known as Bax, rose to 1.44 percent, from 1.12 at the end of last year, indicating traders are increasing expectations for policy makers to raise rates.

“The Bank of Canada has signaled some rate hikes may be forthcoming,” said David Love, a trader of interest-rate derivatives in Montreal at Le Groupe Jitney Inc., a brokerage, in an e-mail, referring to the futures contracts. “Bax are now pricing a hike across the curve,” he said, meaning that each Bax contract now shows some chance of a rate rise.

Borrowing Measure

The probability of higher borrowing costs by the central bank’s Dec. 4 meeting rose to better than half after today’s announcement, compared with about 24 percent on March 30, according to Bloomberg calculations on overnight index swaps.

Canada’s dollar rose the most in two months on a closing basis on April 2 after Bank of Canada Governor Mark Carney said in a speech that inflation had been higher and the Canadian economy had been “somewhat stronger and the degree of slack somewhat smaller than the bank had expected.”

Carney will hold a press conference at 11:15 a.m. tomorrow in Ottawa after releasing a detailed quarterly economic forecast.

The central bank’s announcement said the economy will reach full output in the first half of next year, sooner than a January forecast for the third quarter of 2013, while predicting that Europe will emerge from recession later this year and that the U.S. recovery will be stronger than policy makers expected.

Faster Growth

“Expectations for rate hikes are creeping forward a little bit into late 2012, early 2013,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, in a telephone interview from Toronto. “There’s a bit of a hawkish bias to these headlines.”

The bank raised its growth estimate for this year to 2.4 percent from 2 percent, and lowered the 2013 forecast to 2.4 percent from 2.8 percent. It also gave its first prediction for 2014 growth, at 2.2 percent.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” policy makers led by Carney said in a statement from Ottawa today. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

The Canadian dollar has strengthened 1.2 percent this year among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The U.S. dollar is down 2.2 percent.

Demand for Spanish 12-month bills was 2.9 times the amount sold, compared with 2.14 times last month, Bank of Spain data today showed. The bid-to-cover for the longer maturity notes was 3.77, compared with 2.93 on March 20. The yield on the 10-year bond slid 15 basis points, or 0.15 percentage point, to 5.92 percent, after rising yesterday to 6.16 percent.

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