Canadian Dollar Drops From 13-Month High Amid Growth Speculation

Canada’s currency dropped from a more-than 13-month high against its U.S. counterpart as investors speculated whether the Federal Reserve’s stimulus measures will spur economic growth outside of America.

The currency fluctuated as technical measures indicated the rally was approaching levels traders say suggest it may be close to overdone. It earlier reached the strongest level since August 2011 as the U.S. central bank’s plan spurred demand for higher-yielding assets. Canadian Finance Minister Jim Flaherty said that while he is concerned about volatility, recent gains in the country’s currency reflect Canada’s economic success.

“While the Canadian dollar is sensitive to commodities and asset prices in general, it has a leftover risk response to global economic conditions,” said David Watt, chief economist at HSBC Bank Canada in Toronto. “We haven’t seen any clear indication that these moves are going to have an improving backdrop to growth.”

The Canadian currency weakened 0.3 percent to 97.14 cents per U.S. dollar at 5 p.m. in Toronto. It earlier touched 96.33 cents, the strongest level since Aug. 4. One Canadian dollar purchases $1.0294.

The currency “will run out of steam, and I can’t see us getting back to the lows we saw in July 2011,” Watt said.

The currency touched 94.07 cents per dollar on July 26, 2011. Its record is 90.58 cents was set in November 2007. It has averaged C$1.1518 the past decade.

Relative Strength

The 14-day relative strength index for the Canadian dollar versus the U.S. dollar was 68. A reading above 70 indicates an asset may have rallied too far, too quickly and may be due for a retracement.

The U.S. central bank said yesterday it would keep interest rates near zero until 2015 and begin buying mortgage securities to spur the economy of Canada’s biggest trading partner. The so-called loonie rose to a more than six-month high against Japan’s yen, where interest rates are also near zero.

The loonie, as the currency is known because of the waterfowl on the C$1 coin, rose as much as 1.3 percent to 81.06 yen, the strongest since May 4, before trading at 80.68 yen.

The next resistance levels to Canadian dollar appreciation against the greenback are 96.34 cents and 94.93 cents, George Davis, chief technical analyst for fixed income and currency strategy in Toronto at Royal Bank of Canada, wrote to clients today. Support is where sell orders may be clustered.

There is a 58.5 percent probability that the Bank of Canada will raise interest rates from 1 percent by its July 2013 meeting, according to overnight index swaps. Economists revised their outlook for a Bank of Canada rate increase to the third quarter of 2013 from the second quarter in the prior Bloomberg News survey.

Asset Rally

Canadian stocks, government bonds and currency had cumulative net inflows today, according to Bank of New York Mellon client data.

Canadian stocks rose, sending the benchmark index toward its highest close since March, as commodities including crude oil rallied. The Standard & Poor’s/TSX Composite Index added 1.1 percent. Crude for October delivery crossed the $100-a-barrel threshold for the first time since May. Oil is Canada’s biggest export.

Canadian bonds fell, with the yield on the 10-year benchmark rising 10 basis points, or 0.10 percent to 1.97 percent. The 2.75 percent security slid 88 cents to C$106.87.

Forecast Revisions

Economists cut their yield forecasts for Canadian 10-year bonds for the fifth straight month and pushed back the date of an expected central bank interest-rate increase this week on a bet a slowing U.S. economic recovery won’t trigger a strong rebound in Canada.

Yields on 10-year bonds will end the year at 1.8 percent, down from a forecast of 1.95 percent last month, according to the median estimate of 19 economists surveyed by Bloomberg from Sept. 7 to Sept. 12.

Flaherty, speaking in Oshawa, Ontario, said the country’s fiscal and economic fundamentals “are sound and to some extent that’s reflected in our currency, being a currency in which people around the world have some faith.”