Canadian Dollar Climbs From Two-Week Low as Equities Advance

Canada’s dollar strengthened from the lowest in more than two weeks versus its U.S. counterpart as investor aversion to higher-returning assets eased.

The currency is down this month against most of its major peers on concern European leaders meeting this week will fail to resolve the region’s debt crisis, dimming the outlook for countries that export commodities. Trading patterns suggest the Canadian currency is bound in about a half-cent range, according to Blake Jespersen at Bank of Montreal.

“Market sentiment and developments from the euro-zone continue to be the main drivers for the Canadian dollar,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York, by e-mail. “Softer U.S. and Canadian data is also a key driver. This pushes out rate-hike expectations from the Bank of Canada.”

Canada’s currency, nicknamed the loonie, strengthened 0.5 percent to C$1.0238 per U.S. dollar at 5 p.m. in Toronto. It fell to C$1.0318 yesterday, the lowest since June 12. One Canadian dollar buys 97.66 cents.

Government bonds fell, pushing the yield on Canada’s 10-year security two basis points, or 0.02 percentage point, higher to 1.74 percent, or 11 basis points above equivalent-maturity U.S. Treasuries. The price of Canada’s 2.75 percent bonds due June 2022 dropped 17 cents to C$109.16.

Government bonds have returned 2.6 percent this quarter, compared with 1.5 percent for corporates bonds, Bank of America Merrill Lynch Indexes show.

Oil Correlation

The MSCI All-Country World Index rose 0.2 percent after declining 1.4 percent yesterday. The Standard & Poor’s 500 Index rose 0.5 percent.

Crude oil, Canada’s largest export, rose 0.3 percent to $79.47 a barrel in New York. Brent crude advanced 1.8 percent to $93.06 a barrel.

The loonie is becoming more governed by fluctuations in crude-oil prices. The 30-day correlation coefficient between the Canadian dollar and crude-oil futures rose to 0.82 today, the highest level this year, from 0.60 at the end of May, Bloomberg data show. The average over the past decade is 0.36. A coefficient of 1 means the measures move in lockstep. The correlation dropped as low as 0.30 in February.

The loonie’s correlation with the S&P 500 was 0.91 today, also the highest this year.

The Canadian dollar dropped 0.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, while the greenback fell 0.9 percent and the euro weakened 1.1 percent. New Zealand’s dollar added 4.4 percent to lead gainers.

‘Somewhat Hawkish’

Bank of Canada Governor Mark Carney will lower borrowing costs by the end of the year for the first time since 2009 as investors increase odds that the central bank will have to react to the prospect of a worsening global economy, swap prices show.

Investors are pricing in as many as 11 basis points of central-bank easing by October. There’s a 29 percent chance of one quarter-percentage point cut this year, according to Bloomberg calculations on overnight index swaps, which were pricing in rate increases last month.

Carney reiterated last week in a Halifax, Nova Scotia, speech that he may raise interest rates as the economy continues to move toward full output.

“The Bank of Canada is still somewhat hawkish, but the policy outlook is conditional on external drivers,” said Brown Brothers’ McCormick, who predicts the Canadian currency will weaken to C$1.0340 versus the greenback.

Slowing growth not just in Europe, but also in the U.S., China and other emerging markets is depressing oil prices and hampering the loonie, Canadian Imperial Bank of Commerce analysts including Andrew Grantham wrote in a note to clients today. “Prior expectations of interest rate hikes by the Bank of Canada have largely disappeared.”

CIBC predicts the central bank will leave its overnight rate at 1 percent until 2014, and the loonie will weaken to C$1.04 versus the greenback by the end of September, before returning to parity by year-end.

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