Canada Dollar Climbs for Fourth Day on Central Bank View

Canada’s dollar strengthened to a 13-month high versus its U.S. counterpart, on optimism measures by policy makers in the U.S. and Europe will reduce volatility.

The currency gained for a fourth day as the Federal Reserve prepares to begin a two-day policy meeting where investors anticipate it will announce a third round of bond buying, known as quantitative easing, to spur the economy. A German court cleared the way for a ruling tomorrow on a European bailout plan. The anticipated price swings versus the U.S. dollar were almost the lowest in five years, according to options pricing.

“The movement we’ve seen in the Canadian dollar, we’re a little suspicious of it because it seems to be part and parcel with the theory that more global stimulus is coming and therefore the market rallies,” said David Madani, an economist at Capital Economics Canada in Toronto. “Global monetary policy makers are trying to pull out all the stops right now.”

The loonie, as the currency is nicknamed after the image of the waterfowl on the C$1 coin, rose 0.5 percent to 97.30 cents per dollar at 4:15 p.m. in New York. It touched 97.14 cents, the highest since Aug. 4, 2011. One Canadian dollar buys $1.02775.

Crude oil futures rose 0.4 percent to $96.91 a barrel in New York, for a fifth day of gains. Oil is Canada’s largest export.

Relative Strength

The 14-day relative strength index for the Canadian dollar versus the U.S. dollar rose to 71.8, the highest since March 2010. A reading above 70 indicates an asset may have rallied too far, too quickly and may be due for a correction.

Canadian bonds fell, with the yield on the two-year benchmark rising one basis point, or 0.01 percentage point, to 1.18 percent and the yield on the 30-year security rising two basis points to 2.44 percent. The 4 percent bond maturing in June 2041 fell 57 cents to C$132.03.

Inflows in to the Canadian dollar today are almost twice as strong as the daily average over the past year, according to Bank of New York Mellon client data.

“Amongst other G-10 currencies, we are seeing steady net flows into especially the Canadian dollar and New Zealand dollar over the past week,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon wrote.

Implied volatility for one-month options on the U.S. dollar versus the Canadian currency was close to the lowest level since May 2007 at 6.6 percent. The five-year average is 12 percent. Implied volatility reflects the expected pace of swings for the currency pair.

Volatility Play

“The important thing for the Canadian dollar is that central-bank policy has removed tail risk and crushed volatility,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, said in a phone interview. “The loonie has a bias today to be higher and it’s a hard trend to fight.”

Gains in the currency were limited after the nation’s trade deficit unexpectedly widened due to plunging exports of crude petroleum.

“The Canada data probably bears more watching as a check on Canadian dollar strength,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York, wrote to clients today. “The foreign-exchange market is looking elsewhere, with broad-based U.S. dollar weakness showing the extent to which the market believes QE3 is imminent this week.”

Canada posted a C$2.34 billion ($2.4 billion) deficit during the month, from a revised C$1.93 billion in June, Statistics Canada said today in Ottawa.

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