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Canadian Dollar Gains on North American Growth Outlook

Canada’s dollar rose against most of its major counterparts on speculation North American economic growth will outpace other regions’ as the failure of Greece to form a government spurs risk aversion.

The Canadian currency is up 0.7 percent in the past week, rising with haven currencies the yen and U.S. dollar, amid concern Greece may be the first member state to exit the euro. Employment climbed almost six times more than economists forecast, Statistics Canada said last week, fueling bets the central bank will be the first in the Group of Seven nations to raise interest rates.

“There are some structural factors that work in Canada’s favor,” David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “We have one of the lowest debt to GDP ratios in the world. We’ve also had signs of a strong domestic economy. We’re looking for a stronger Canadian dollar over the course of the year.”

Canada’s currency, nicknamed the loonie, rose against all but four of its 16 major counterparts. It dropped 0.3 percent to C$1.0037 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 99.63 U.S. cents.

The loonie has traded within a three-cent range versus the greenback since the end of January, sliding to C$1.0063 on May 9 and strengthening to 98 cents on April 27. It will trade at 98 cents at year-end, according to the median forecast in a Bloomberg News survey of 41 economists.

“The Canadian dollar remains a preeminent trade because the employment data was very good,” said Boris Schlossberg, director of research at online currency trader GFT Forex, by phone from New York. “From every aspect, growth and balance sheet, the Canadian dollar continues to look the best in the Group of 10. The North American bloc is going to outperform.”

Sovereign Debt Concern

Ten-year government bonds rose for a second day, pushing the yield down three basis points, or 0.03 percentage point, to 1.94 percent. It touched 1.91 percent, the lowest since Feb. 2. The price of the 2.75 percent securities due in June 2022 increased 31 cents to C$107.45.

“Lingering uncertainty in Greece” caused the 10-year yield to drop, said George Davis, chief technical analyst for fixed-income and currency strategy at Royal Bank of Canada’s RBC Capital Markets unit, in an e-mail.

Canada’s statistics agency said May 11 that employers added a net 58,200 jobs to payrolls in April, after an increase of 82,300 in March, for the biggest two-month gain in more than 30 years. Economists predicted jobs would rise 10,000, according to median forecasts compiled by Bloomberg.

“We came out of the weekend with no deal done in Greece,” said GFT’s Schlossberg. “I don’t expect the Canadian dollar to strengthen against the U.S. dollar, but to stay relatively firm against everybody else, simply because the dollar is naturally going to get flight-to-safety flows as the crisis deepens.”

Weighted Indexes

The Canadian dollar rose 0.7 percent during the past week versus nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar advanced 1.3 percent, while the yen gained 1.4 percent.

Investors are becoming more convinced that Bank of Canada Governor Mark Carney will focus more on surging domestic job and housing markets rather than weakness abroad, swaps trading suggests.

Close to one interest rate increase by Carney this year remains priced in, according to Bloomberg calculations on overnight index swaps. At the same time, the difference between two-year and 10-year government bond yields narrowed to 66 basis points today, the flattest yield curve among Group of Seven nations.

Expectations for Canadian interest rates have seesawed during the past two months as investors try to reconcile signs of a domestic housing boom in an economy returning to full output against the risk demand will be eroded by international forces such as a deepening debt crisis in Europe and signs of weakness in the U.S. jobs market. Carney has kept his key lending rate unchanged at 1 percent since September 2010 in the longest pause since the 1950s.

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