Canadian Dollar Rallies With Stocks, Oil. BOC Rates View

Canada’s dollar strengthened against its U.S. counterpart as stocks and crude oil rallied amid speculation stronger inflation and economic growth will spur the Bank of Canada to consider higher interest rates.

The Canadian currency was headed for a 1 percent gain this month versus the greenback. The loonie, as the currency is nicknamed, briefly pared gains after Statistics Canada said retail sales unexpectedly fell for the first time in seven months.

“Risk is coming back on the table,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc., by phone from New York. “Commodities across the board are doing well. That certainly helps.”

Canada’s currency advanced 0.4 percent to 98.71 cents per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys $1.0131.

The Standard & Poor’s 500 Index rose 0.4 percent while futures on crude oil, Canada’s biggest export, added 0.7 percent to $103.75 in New York.

An hourly close below 99.02 cents means there’s “a short-term shift in sentiment at hand” and the Canadian dollar will likely appreciate to as much as 98.68 cents by the end of April, George Davis, chief technical analyst for fixed-income and currency strategy at Royal Bank of Canada’s RBC Capital Markets unit, said via e-mail.

Technical Pressures

“The break below 99.02 appears to have shifted sentiment back into the bearish camp over the short-term,” Davis said, referring to views for the U.S. dollar. “Despite the razor-thin margins we’ve seen, there’s a good chance we could test this low over the next week.”

Canadian 10-year government bonds were lower, pushing the yield up three basis points, or 0.03 percentage point, to 2.07 percent. The price of the 3.25 percent securities maturing in June 2021 lost 29 cents to C$109.76.

Canadian 10-year bond yields are trading 10 basis points above comparable U.S. securities. The so-called spread was 10 basis points below at the end of last month. Canada’s federal government bonds have lost 0.5 percent this year, according to a Bank of America Merrill Lynch index.

Implied volatility for one-month options on the Canadian dollar versus the greenback decreased to 7.3 percent, compared with 7.5 percent yesterday. It reached 6.75 percent on March 19, the lowest level since June 2007.

Price Swings

Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings. Lower volatility tends to favor higher-yielding currencies such as the Canadian dollar.

The loonie was the second-best performing currency this month after the yen on speculation Canada may become the only Group of Seven country to raise interest-rates this year. Policy makers said April 17 the removal of stimulus is “appropriate” in light of inflation and economic growth stronger than the bank’s earlier projections.

Bank of Canada Governor Mark Carney has held rates steady at 1 percent since September 2010 as he gauges the effect of the euro-zone debt crisis on the domestic economy, which relies for about a third of its output on exports.

“We still have the positive-rate story,” said Geoff Kendrick, head of European currency strategy at Nomura Holdings Inc., by phone from London. “We’ve gone marginally off the tail-risk-type story. There’s still news about that, but really the more big-picture driver is likely to be growth this year.”

BOC Talks

Carney was quizzed by lawmakers today about rising home prices and consumer debt and said that families should use “caution” because borrowing costs will rise.

The average home price is about 4.75 times income today, compared with a historical average of 3.5 times, he told the House of Commons Finance Committee today in Ottawa. He also said that in some housing markets “valuations are firm,” declining to repeat a lawmaker’s use of the word “bubble.”

Retail sales decreased 0.2 percent to C$38.9 billion ($39.3 billion) in February, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast a 0.1 percent increase, based on the median of 23 projections.

The retail sales numbers “provided a bit of a bounce” for the U.S. dollar versus the Canadian dollar, said Matt Perrier, Toronto-based director of foreign exchange at Bank of Montreal, in a telephone interview. “The numbers came in weaker than expected. We’re still in the broader range of 98.50 cents to C$1.0050.”

The currency has oscillated in a 2-cent range between 98.42 cents and C$1.0054 since the end of January. It will appreciate to 98 cents by the end of 2012, according to the median of 40 forecasts compiled by Bloomberg News.

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