Canada Dollar Rises to Strongest in 3 Months on Growth Prospects

Canada’s dollar climbed to the highest level since May versus its U.S. counterpart, trading stronger than parity for a ninth day, amid speculation North American economic growth will sustain the nation’s exports.

The currency has gained versus the majority of its 16 most-traded peers this month after jobs and retail sales in the U.S., Canada’s biggest trade partner, rose more than forecast in July. The euro has slid, reaching a record low today against Canada’s dollar, amid concern European leaders are struggling to resolve their debt crisis. American industrial production exceeded estimates last month, data showed today.

“Canada is still seen as a safe place to park money on a relative basis,” Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets unit in Toronto, said in a telephone interview. “The U.S. industrial production number came in slightly better than expected; that was a little bit Canada-supportive.”

The Canadian currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, appreciated 0.3 percent to 98.94 cents per U.S. dollar at 5 p.m. in Toronto. It touched 98.87 cents, the strongest since May 4. One Canadian dollar buys $1.0107. The two currencies reached a one-for-one basis on Aug. 3 for the first time since May.

The loonie advanced as much as 0.7 percent against the euro to C$1.2145, the strongest since the 17-nation currency began trading in 1999.

Canada’s dollar has gained 3.5 percent this year against nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted indexes. It was the best performance after the New Zealand dollar’s 4.2 percent advance. The U.S. dollar was little changed.

Low Volatility

Implied volatility for one-month options on the U.S. dollar versus the Canadian currency was at almost the lowest in more than five years. It fell for a second day, reaching 6.240 and approaching the 6.2225 percent it reached on July 20, the lowest on an intraday basis since May 2007. 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.

Government bonds dropped for a third day, pushing yields on the 10-year benchmark security up 10 basis points, or 0.1 percentage point, to 1.95 percent, the highest level since May 16. The price of the 2.75 percent notes maturing in June 2022 slid 90 cents to C$107.08.

Debt Auction

Canada auctioned C$3.4 billion ($3.44 billion) of five-year debt today, drawing an average yield of 1.538 percent. The securities carry a 1.5 percent coupon and mature in September 2017. The sale attracted C$8.8 billion in bids, for a bid-to-cover ratio of 2.60. The last five-year security sale, an offering of the same amount of bonds, drew an average yield of 1.244 percent and had a bid-to-cover ratio of 2.65.

The loonie gained versus most major currencies as Standard & Poor’s GSCI index of raw materials climbed 1 percent, and crude oil for September delivery rose to as high as $94.90 a barrel in New York, the most since May 15. Raw materials including oil account for about half of Canada’s export revenue, and crude is the nation’s biggest export.

The loonie extended its advance after Federal Reserve data showed U.S. industrial production increased 0.6 percent in July, after a revised 0.1 percent gain in June that was smaller than previously reported. Economists in a Bloomberg News survey forecast a 0.5 percent rise. Manufacturing, which makes up about 75 percent of total production, advanced 0.5 percent for a second month.

Canada ships about three quarters of its exports to the U.S.

Canadian Manufacturing

Canadian factory sales rose in June for the first time in three months, economists in a Bloomberg News survey forecast before Statistics Canada reports the data tomorrow. Manufacturing sales increased 0.3 percent, after a 0.4 percent drop in May, they projected.

The loonie has traded at stronger levels than its 50-, 100-and 200-day moving averages since July 26 as it gained beyond parity with its U.S. counterpart. The Canadian dollar has been as strong this year as 98 cents to the greenback on April 27 and as weak as C$1.0447 on June 4.

The U.S. currency gained earlier versus most major peers after Goldman Sachs Group Inc. said in a report yesterday the Fed will delay a third round of bond-buying, known as quantitative easing.

Retail Sales

U.S. retail sales advanced 0.8 percent in July, data showed yesterday, the biggest jump since February and first gain in four months, the Commerce Department said yesterday. American employers added 163,000 jobs last month, the government said Aug. 3, compared to a 64,000 increase in June.

The loonie remained higher today even after a report showed the cost of living in the U.S. remained little changed in July and a factory gauge of the New York region unexpectedly fell.

The U.S. consumer price index reading capped a 1.4 percent gain over the past 12 months, the smallest year-to-year increase since November 2010, the Labor Department reported today in Washington. The Fed Bank of New York’s general economic index dropped to minus 5.9 this month. A Bloomberg survey projected 7.0. Negative readings signal contraction.

“As long as CPI is fairly soft, as long as the data does not continue to surprise on the upside as it has, then it leaves the door open to the potential for QE3,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotiabank unit in Toronto, said in a phone interview.

The U.S. central bank bought $2.3 trillion of assets in two rounds of quantitative easing between December 2008 and June 2011 to spur the economy.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE