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Canadian Dollar Rises to Highest Since September on Rates

Canada’s dollar traded at almost a seven-month high versus its U.S. counterpart on speculation the Bank of Canada raising borrowing costs in the world’s 10th-largest economy will add to the currency’s allure.

The Canadian currency fluctuated after erasing a gain as a report showed more Americans than forecast filed jobless claims. Bank of Canada Governor Mark Carney reiterated yesterday while answering questions at the Senate’s banking committee in Ottawa that rate increases “may become necessary” as the economy recovers.

Futures markets are “starting to price in the probability of a Bank of Canada rate hike by the fall, and that’s really driving the Canadian dollar’s strength,” said Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets unit in Toronto, in a telephone interview.

Canada’s currency touched 98.07 cents per U.S. dollar, the strongest since Sept. 19, before trading at 98.43 cents at 5 p.m. in Toronto. One Canadian dollar buys $1.0160.

The Standard & Poor’s 500 Index gained 0.7 percent, while the Thomson Reuters/Jefferies CRB Index of raw materials was up 0.4 percent. Raw materials account for about half of Canada’s export revenue.

Weekly Gain

The loonie, as the currency is nicknamed, was 0.8 percent higher during the past week for the best performance among 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollars of commodity exporters Australia and New Zealand were little changed and down 0.5 percent on the week.

“You have better commodities, better equities, that’ll get you a stronger Canada anyway,” said CIBC’s Enright. “The fact that we’re outperforming the other commodity currencies is a function of the rate story.”

Canadian two-year government bonds rose, pushing the yield down three basis points to 1.38 percent after rising in five straight sessions. The 0.75 percent securities maturing in May 2014 added seven cents to C$98.75.

Federal government bonds have lost 0.7 percent this year, according to Bank of America Merrill Lynch’s Canadian Governments index.

Two-year yields rose 16 basis points last week, the most since September, and the spread between two-year Canadian and U.S. two-year government debt widened to 116 basis points two days ago, the biggest gap since May 2011 on speculation Carney is preparing to raise borrowing costs this year to counter inflation that’s rising faster than the Bank of Canada previously predicted.

Borrowing Odds

The probability of higher borrowing costs by the central bank’s October meeting rose to about 75 percent today, 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.

“We’ve put a bit of water between us and parity,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA, by phone from London. “The pressure for the Bank of Canada to eventually raise rates can only grow,” as the U.S. economy recovers and its central bank is on “permanent hold.”

U.S. jobless claims fell by 1,000 to 388,000 in the week ended April 21 from a revised 389,000 the prior period that was the highest since early January, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News called for a drop to 375,000.

Level Struggle

Canada’s dollar may struggle to move much stronger than 98 cents because there are “lots of U.S. dollar buyers” at that level, said Firas Askari, head currency trader at Bank of Montreal in Toronto, in an e-mail. “The trade for today is probably higher for the U.S. dollar versus the Canadian,” he said. The fact that the Canadian dollar pared gains on second-tier data such as jobless claims demonstrates the “lack of conviction in the market.”

Until two days ago, the currency had 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.

“The Canadian dollar broke out of its range and Carney’s been maintaining his hawkish stance,” said Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York. “When all the other central banks are keeping their options open or even pursuing further easing, the Bank of Canada stands out as the only hawkish of the major central banks. Because of those diverging policy expectations, that’s likely to have a positive impact on the Canadian dollar.”

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