Canada’s dollar climbed to the strongest since May versus its U.S. counterpart after European Central Bank President Mario Draghi’s comments about preserving the 17-nation currency sparked a rally in higher-risk assets.
The Canadian currency was headed for an increase against the greenback this week amid gains in stocks and crude oil, the nation’s largest export. Draghi said policy makers will do whatever is needed to preserve the euro.
“The big thing today was Draghi’s comments,” Ravi Bharadwaj, a market analyst at Western Union Business Solutions, a unit of Western Union Co, said in a telephone interview from Washington. “If the ECB, for whatever reason, fails to back up what Mr. Draghi said today and his board members said yesterday, you could see a general decrease in risk appetite, which could weigh on the Canadian dollar.”
Canada’s currency, nicknamed the loonie, gained as much as 0.9 percent, the most this month, and advanced to C$1.0102 per U.S. dollar at 5 p.m. in Toronto, touching the strongest since May 16. One Canadian dollar buys 99.01 cents.
The Standard & Poor’s 500 Index rose 1.7 percent. Crude for September delivery rose as much as 1.7 percent to $90.47 a barrel in New York. Canada’s currency is most closely correlated with moves in stocks and commodity prices.
The Canadian dollar has risen 2 percent this year, according to the Bloomberg Correlation-Weighted Indexes. The greenback has gained 0.8 percent and the euro has slipped 5.1 percent. Based on Canada’s domestic economy and core growth rates, the loonie “should be, in the long term, a better prospect for investors,” Bharadwaj said.
Government bonds fell for a second day. The benchmark 10-year yield rose six basis points, or 0.06 percentage point, to 1.65 percent, as the price of the 2.75 percent security due in June 2022 declined 54 cents to C$109.99.
The loonie strengthened beyond the 50-day, the 100-day, and the 200-day moving averages and options-traders paid less for protection against declines in the Canadian dollar versus its U.S. counterpart.
The 100-day moving average at C$1.0087 is “proving a level which has appeared more significant to the market of late” than the 200-day, Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, wrote in a note to clients today.
The average, a momentum indicator, is calculated by adding closing prices for the past 100 days, then dividing by 100. Crossing a moving average is often considered a turning point in the direction of a security’s price.
So-called risk reversals show options traders are paying less for protection against loonie weakness. The premium for the right to buy the U.S. currency against the loonie in three months, compared to the right to sell it, dropped to 1.43 percentage points today. It reached 0.99 percentage points on July 20, the lowest this year.
“We’re still bullish on the Canadian dollar,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, said in a telephone interview. Sutton predicts the currency will reach 99 U.S. cents at the end of this year and 97 U.S. cents by the end of 2013.
That’s more bullish than median estimates in a Bloomberg survey of 41 analysts and economists, which predict the loonie will end 2012 at C$1.02 and 99 cents at the end of next year.