Canada Dollar Gains for 3rd Week as Central Banks Fuel Risk

Canada’s dollar rose against its U.S. peer for a third week, the longest streak since February, as speculation central banks will take action to bolster economic growth spurred demand for riskier assets.

The currency gained after European Central Bank President Mario Draghi, German Chancellor Angela Merkel and French President Francois Hollande said they would do whatever is necessary to protect the euro. U.S. economic growth slowed less in the second quarter than economists forecast. A report July 31 is projected to show Canada’s economy expanded 2.6 percent in May from a year earlier.

“The Canadian dollar is going to be having more strong days than weak days,” Craig Wright, economist at Royal Bank of Canada, the nation’s largest lender, said in a telephone interview. “We’ve heard sort of a change in tone from authorities in Europe, and I think that will open the door for this risk-on trade. In that environment, we’ve seen commodity prices firm and the Canadian dollar move higher.”

Canada’s currency, nicknamed the loonie, rose 0.9 percent this week to C$1.0033 per U.S. dollar in Toronto. The currency, which last gained for three weeks during the period ended Feb. 3, is up 1.3 percent versus the greenback this month. One Canadian dollar buys 98.68 U.S. cents.

Net Shorts

Futures traders increased their bets the Canadian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed July 27.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 2,432 on July 24, compared with net shorts of 1,208 a week earlier. Futures are agreements to buy or sell assets at a set price and date.

The loonie breached its 50-, 100- and 200-day moving averages this week as it approaches parity with the U.S. dollar. The last time the two traded on a one-to-one basis was May 15, when the loonie touched 99.90 cents to the greenback. Canada’s dollar has traded in 2012 as strong as 98.04 cents on April 27 and as weak as C$1.0447 on June 4.

Canadian government 10-year bonds fell, pushing yields on up 13 basis points, or 0.13 percentage point, to 1.72 percent. The 2.75 percent securities maturing in June 2022 dropped C$1.29 to C$109.06.

Central Banks

ECB President Draghi will hold talks with Bundesbank President Jens Weidmann on ECB bond purchases, to overcome the biggest stumbling block to a new raft of measures to stem the region’s debt crisis, including bond purchases, two central-bank officials said. They requested anonymity because the talks are private.

The ECB is scheduled to meet next week.

“The question is whether the rescue will live up to market expectations,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc., said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “I think it is doubtful whether a program will be announced” next week.

Implied volatility for one-month options on the Canadian dollar versus the greenback rose to 6.53 percent this week, after falling for the past seven weeks. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Decreased volatility makes investments of currencies of nations with higher benchmark interest rates more attractive because there is less risk of market moves erasing profits.

Dollar Bull

“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 predicted the currency will reach 99 U.S. cents at the end of this year and 97 U.S. cents by the end of 2013.

Bank of Canada policy makers held the country’s main interest rate at 1 percent July 17 and said an increase remains possible. The Ottawa-based central bank meets Sept. 5 to reconsider rates.

“Eventually, we see rates moving up in Canada well ahead of what we expect by many other central banks,” Wright said. “The trend will be toward a strengthening Canadian dollar rather than a weakening.”

The Federal Reserve will open a two-day meeting July 31. While policy makers refrained from introducing a third round of asset purchases at their session last month, Fed Chairman Ben S. Bernanke indicated that it’s a possibility. The central bank purchased $2.3 trillion of securities from 2008 to 2011 in two rounds of a stimulus strategy called quantitative easing.

Economic Data

A Statistics Canada report July 31 may show Canada’s gross domestic product, the value of all goods and services produced, rose at a 0.2 percent in May, according to the median estimate of economists surveyed by Bloomberg News.

The loonie rose 0.1 percent this week against nine major counterparts, according to the Bloomberg Correlation-Weighted Indexes. It has gained 2.4 percent this year, while the U.S. dollar added 0.4 percent.

Canada’s dollar will end the year at C$1.02 per U.S. dollar, according to median estimate of 41 forecasters surveyed by Bloomberg News.

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