Canada’s dollar appreciated by the most since March against its U.S. counterpart as the prospects for higher interest rates attracted buyers.
The Canadian currency had its largest gains versus the yen and Brazil’s real after Bank of Canada Governor Mark Carney said the removal of economic stimulus may be “appropriate,” given stronger growth and inflation. The central bank has kept its policy rate at 1 percent since 2010. Retail sales slowed in February, according to a survey of economists before the Statistics Canada report on April 24.
“The Bank of Canada announcement was the main driver of the Canadian dollar’s strong performance,” Blake Jespersen, director of foreign exchange at Bank of Montreal, said in a phone interview from Toronto. “That’s caused a shift in investors’ view towards higher rates sooner in Canada and as a result, a higher floor for the Canadian dollar.”
The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, ended yesterday at 99.24 cents per U.S. dollar in Toronto, up 0.7 percent for the week, the most since the five days through March 2. It touched 98.65 cents on April 27, the strongest level since March 20. One Canadian dollar buys $1.0077.
Government bonds fell, pushing the yield on the benchmark 10-year note higher by seven basis points, or 0.07 percentage point, to 2.06 percent. The 3.25 percent securities maturing in June 2021 declined 65 cents to C$109.86.
Federal bonds have lost 0.7 percent this year, according to Bank of America Merrill Lynch data.
Futures traders increased their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 38,028 on April 17, compared with net longs of 27,967 a week earlier.
Futures data also signal Canada will be the first Group of Seven nation to boost interest rates within six months. The probability of higher borrowing costs by the central bank’s October meeting rose to 64 percent yesterday, according to Bloomberg calculations based on index swaps. Odds were 19 percent on April 16, the day before policy makers suggested rates would rise sooner than economists expected as slack in the economy evaporates. The odds were about 18 percent on March 30.
“I don’t think expectations are overdone,” said Greg Anderson, the North American head of Group-of-10 currency strategy in New York at Citigroup Inc. The Bank of Canada’s higher inflation forecast is a “noteworthy shift,” he said, “and the data doesn’t change anything so far as that goes.”
Canada, the world’s 10th largest economy, will grow at a 2.5 percent annualized pace this quarter, up from a January estimate of 1.8 percent, the Bank of Canada said in a quarterly policy report this week. Inflation will average 2 percent through June, higher than a previous estimate of 1.5 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 April 17. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”
Statistics Canada said yesterday from Ottawa March consumer prices rose 1.9 percent from a year earlier, following a 2.6 percent rise in February. That compared with a median forecast for a 2 percent increase.
“The domestic market and even the trading market are quite comfortable with the economics of Canada,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, in a telephone interview. “People are also selling dollar-Canada on the back of improved global sentiment.”
Futures on crude oil, Canada’s biggest export, increased 0.2 percent this week to $103.05 barrel. Copper futures climbed 1.8 percent to $3.7065 a pound in New York. Raw materials account for about half of Canada’s export revenue.
The Canadian dollar rose 0.7 percent during the past three months in the fifth-best performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The biggest gainers were the Norwegian krone, up 2.5 percent and the pound, up 2.2 percent.
The loonie traded as low as C$1.0319 in January before rallying to 98.42 cents per U.S. dollar last month. It will weaken to parity with its U.S. counterpart by the end of June before strengthening to 98 cents at year-end, according to the median of 38 forecasts compiled by Bloomberg.
“You’ve got to play the range until it breaks,” said John Curran, senior vice president in Toronto at CanadianForex Ltd., an online foreign-exchange dealer, in a telephone interview.