Canadian Dollar Advances in June on Europe Debt-Crisis Optimism

Canada’s dollar rose this month against its U.S. counterpart as optimism Europe is closer to resolving its debt crisis spurred demand for riskier assets.

The currency had the biggest advance since November yesterday after European leaders agreed to relax conditions for emergency loans to Spanish banks. Stocks gained on the month and volatility fell the most since January, lifting the Canadian dollar. The nation’s employers added jobs in June for a fourth straight month, economists forecast before the July 7 report.

“People are reading it as a step in the right direction,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview of the EU agreement. “It’s been something that boosts sentiment, and when sentiment is boosted, the Canadian dollar tends to do well.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, gained 0.8 percent this week to C$1.0166 per U.S. dollar in Toronto. One Canadian dollar purchases 98.37 U.S. cents.

Ten-year government bonds rose, pushing the yield down seven basis points, or 0.07 percentage point, to 1.74 percent. It touched 1.615 percent on June 1, the lowest since 1950, according to Bloomberg and Bank of Canada data.

Implied volatility for one-month options on the Canadian dollar versus the greenback fell to 7.85 percent yesterday, down from 9.57 percent at the end of May. The 10-year average is 10 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

‘Risk Squeeze’

All of the currency’s gains this month came yesterday after EU President Herman Van Rompuy said officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status.

“Once this risk squeeze has run its course and the market realizes this solution does not solve the problem, the quicker we’ll be trading back in the hole again,” said Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp., in an e-mail. “For the loonie, things are getting a little overheated.”

The government will announce further details on July 5 of its plans to sell five-year securities on July 11. The previous auction of five-year bonds, on May 9, drew an average yield of 1.534 percent and a coverage ratio -- the amount bid relative to the amount on offer -- of 2.59 times. The ratio averaged 2.41 times over the previous three five-year auctions.

Employment Report

Employment in June rose by 5,000 positions and the jobless rate held steady at 7.3 percent, according to the median of 21 forecasts compiled by Bloomberg. Ottawa-based Statistics Canada releases the data on July 6.

The loonie dropped 1.2 percent this month when measured against nine major counterparts in Bloomberg Correlation Weighted Indexes. It dropped for the first time in three quarters versus the greenback, falling 1.8 percent, as crude oil, Canada’s largest export, lost almost a fifth of its value.

Canada’s currency extended gains yesterday after the statistics agency reported the world’s 10th largest economy expanded 0.3 percent following a March gain of 0.1 percent. Economists surveyed by Bloomberg News projected a 0.2 percent gain, based on the median of 23 estimates. Mining and oil and gas extraction advanced 2.7 percent, after declining in the previous two months following maintenance shutdowns.

‘Less Dovishness’

It underperformed its commodity peers of Australia and New Zealand, which rose 4.5 percent and 5.6 percent this month against the greenback, after statements from their central bankers suggested cuts were less likely, while Bank of Canada Governor Mark Carney said the country’s economy may grow less than the central bank forecast.

Odds of a cut in the central bank’s overnight target rate by year-end ended the month at about 30 percent, according to Bloomberg calculations on overnight index swaps. At the end of April, swaps were pricing in rate increases.

“Aside from the broader global growth sentiment, in Australia and New Zealand you had a little less dovishness from the central banks,” said RBS’s Kim. “The Bank of Canada added some more conditionality to a potential withdrawal of stimulus. The Flaherty moves on the housing market are probably another reason why CAD underperformed.”

Canadian Finance Minister Jim Flaherty said June 21 he will tighten mortgage terms as the country tries to avert a household debt crisis. The government will shorten the maximum amortization period on mortgages the government insures to 25 years from 30 years, and lower the maximum amount homeowners can borrow against the value of their homes to 80 percent from 85 percent, Flaherty said.

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