Canada’s Dollar Gains for Second Month on Increased Risk Demand

Canada’s dollar posted a second monthly gain versus its U.S. peer as speculation the Federal Reserve and European Central Bank may extend liquidity operations spurred appetite for higher-risk currencies.

The loonie, as the Canadian currency is nicknamed, added 1.4 percent in July, after gaining 1.6 percent in June, amid optimism the ECB will take steps to lower bond yields in Spain and Italy, and before Fed policy makers end a two-day meeting tomorrow. The currency fell today against the greenback after a report showed Canada’s May economic expansion trailed forecasts.

“Everyone is looking at what’s going on with the Fed and the ECB this week,” Charles St-Arnaud, an economist in New York at Nomura Holdings Inc., said in an interview. “We’ve had a good run of appreciation in the Canadian dollar. Most of it is on the expectation that you’ll have some form of easing from the ECB or the Fed. If either of those two central banks disappoint this week, dollar-Canada could jump higher on that.”

The Canadian currency appreciated 0.2 percent to C$1.0031 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 99.69 U.S. cents.

Recent gains in higher-risk currencies including the dollars of Canada, Australia and New Zealand, as well as Sweden’s krona and Norway’s krone, may have further to run as Chinese data improves and investors increase holdings of euros, according to Todd Elmer, head of Group-of-10 currency strategy for Asia excluding Japan at Citigroup Inc.

Citigroup’s Economic Surprise Index for China has “begun to bounce,” while the bank’s foreign-exchange positioning indicator shows a surge in euro buying since July 20, he wrote.

‘Further Room’

“The rise in risky-currency longs is somewhat more modest than we might anticipate on the basis of the recent relationship with euro positioning,” Singapore-based Elmer wrote in a note to clients today. “This suggests there could be further room for risky-currency buying as investors put more money to work.” A long position is a bet a currency or asset will rise.

China’s manufacturing purchasing managers’ index for July may have risen to 50.5 from 50.2 in June, according to the median of 24 estimates before a government report due at 9 p.m. New York time.

Canada’s gross domestic product grew less than economists predicted in May as a manufacturing decline curbed gains in energy and retailing.

Output rose 0.1 percent to an annualized C$1.29 trillion ($1.28 trillion), following gains of 0.3 percent in April and 0.1 percent in March, Statistics Canada said today in Ottawa. The May increase was less than the 0.2 percent median forecast in a Bloomberg survey of economists.

Bonds Rise

Government bonds rose for a second day, sending the benchmark 10-year yield down two basis points, or 0.02 percentage point, to 1.68 percent. The price of the 2.75 percent securities due in June 2022 added 19 cents to C$109.69.

“There’s some expectation that we’ll get QE3 in the U.S.,” Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG, said by phone from Frankfurt, referring to a third round of asset purchases under quantitative easing. That has generated “risk appetite, which is always positive for these commodity currencies.”

The common currency pared gains today after the German Finance Ministry said in an emailed statement it sees no need to give the euro region’s permanent bailout fund a banking license. A license for the European Stability Mechanism would allow it to increase its firepower through access to ECB funds.

ECB President Mario Draghi pledged last week to “do whatever it takes” to preserve the common currency, suggesting policy makers may intervene in bond markets to support ailing euro-area economies.

U.S. Consumers

The U.S. dollar remained lower versus the euro after data showed consumer spending in the U.S. stagnated in June, supporting bets the Fed will expand its balance sheet to stimulate the economy. Central-bank Chairman Ben S. Bernanke said this month U.S. policy makers are “looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market.”

For the U.S. dollar-Canada dollar exchange rate, “it is very likely that all will hinge on central-bank developments over the coming days” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a telephone interview. “Given what seems to be priced into the market at these levels, one might consider the potential for disappointment.”

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