Canadian Dollar Gains From 6-Month Low on BOC Outlook

Canada’s dollar strengthened from almost a six-month low after central bank policy makers said they may raise interest rates with the domestic economic recovery proceeding as forecast, even as global risks have increased.

The currency erased losses against the U.S. dollar after Governor Mark Carney said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” The central bank left its benchmark overnight rate unchanged at 1 percent, as predicted by all 27 forecasters in a Bloomberg survey.

“The statement is fairly similar to the last one -- the tone is still hawkish,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit in Toronto, said in a telephone interview. “It highlights some deterioration, but says the underlying momentum is still strong. It’s positive for the Canadian dollar in the very near term.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, rose 0.1 percent to C$1.0381 per U.S. dollar at 5 p.m. in Toronto after falling as much as 0.3 percent. It touched C$1.0447 yesterday, the lowest level since Nov. 28. One Canadian dollar buys 96.33 U.S. cents.

Government bonds fell for a second day. The yield on benchmark 10-year debt rose six basis points, or 0.06 percentage point, to 1.74 percent as the price of the 2.75 percent securities due in June 2022 dropped 60 cents to C$109.25. The yield touched 1.615 percent on June 1, the lowest in at least six decades, on demand for the safest and most liquid of assets.

‘Most Hawkish’

Carney said in the bank’s April 17 statement that interest-rate rises may be necessary to contain stronger inflation and diminishing slack in the domestic economy. By the end of April, overnight index swaps were pricing in at least one quarter-percentage point increase by the end of 2012, according to Bloomberg calculations.

A resurgence of Europe’s debt crisis after inconclusive Greek elections in May sent swaps in the other direction. As of yesterday, they were pricing in a full quarter-percentage point rate cut by the end of the year.

“The major driver is still what’s transpiring on the European front,” said Sutton. “The Bank of Canada is still the most hawkish advanced-economy central bank.”

Canada’s currency reached 98.04 cents per U.S. dollar on April 27, the strongest in seven months, before plunging more than 6 percent.

Canada’s growth prospects remain “largely consistent with expectations” while the global outlook “has weakened in recent weeks,” the Ottawa-based central bank said today. The world’s 10th-largest economy may be hindered by a deepening debt crisis in Europe, slowing U.S. job growth and cooling emerging markets, which have cut prices of commodities Canada exports.

‘Tightening Bias’

Traders trimmed bets on 2012 interest-rate reductions after the Bank of Canada released its statement. About seven basis points of easing by year-end was priced in, according to Bloomberg calculations on overnight index swaps. That’s down from 34 basis points yesterday, the data show.

The statement was “just what I thought: retain the tightening bias, soften it slightly, which they did,” Greg Anderson, the North American head of Group of 10 currency strategy at Citigroup Inc., said by phone from New York. “It’s not the stage for any central bank to do anything, except possibly for the European Central Bank.”

Greek Elections

Anderson predicts the Canadian dollar will strengthen “against Europe” -- the euro, sterling and the currencies of Norway and Sweden. He said if Greek elections, scheduled for June 17, add to the euro bloc’s debt crisis, the loonie could depreciate to C$1.06 versus the greenback.

“With the Canadian dollar’s safe-haven role relative to other Group of 10 currencies,” he said, “I think we’re probably going to be in a narrow C$1.03 to C$1.05 range for some time now.”

The loonie gained 0.9 percent over the past three months against nine developed-nation peers monitored by Bloomberg Correlation Weighted Indexes. The U.S. dollar was up 4.9 percent, the yen rose 8 percent and the euro fell 1 percent.

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