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Canadian Dollar Rises to 13-Month High as Fed Spurs Risk Demand

Canada’s dollar strengthened to a more than 13-month high against its U.S. counterpart as stimulus measures by the Federal Reserve spurred global demand for higher returning assets such as stocks and commodities.

The dollar gained for a third week versus the greenback and rallied against 11 of its 16 most-traded peers as investors bought the currencies of commodity producing nations including Canada on a bet global economic growth will accelerate. Crude oil, the nation’s biggest export, climbed above $100 yesterday for the first time since May. Statistics Canada will release data on Sept. 17 showing whether international investors added Canadian securities in July.

“The Canadian dollar is up quite a lot after the Fed decision and its complete textbook currency behavior,” Eric Lascelles, chief economist at Toronto-based Royal Bank of Canada Global Asset Management said in a phone interview. “With quantitative easing, the U.S. dollar weakens, commodity prices strengthen and both those things are like catnip for the Canadian dollar.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, gained 0.7 percent to 97.14 cents per U.S. dollar this week. It touched 96.33 cents yesterday, the strongest level since August 2011. One Canadian dollar buys $1.02944.

The Fed said it will expand holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month and hold the federal funds rate near zero until at least the middle of 2015.

Relative Strength

The weekly gain was tempered yesterday after Canadian factory sales fell to an 11-month low and technical measures indicated the rally is approaching levels that traders suggest may be overdone.

The 14-day relative strength index for the Canadian dollar versus the U.S. dollar was 67 yesterday. A reading above 70 indicates an asset may have rallied too far, too quickly and may be due for a retracement.

“The Canada dollar had a pullback after such a push over the past few days, but it was more of a correction than a reflection of the greater economic picture,” Chris Gaffney, co-chief investment officer of EverBank Wealth Management Inc., said in a phone interview from St. Louis.

The loonie has traded at levels stronger than its 50-, 100-and 200-day moving averages since July 26. It reached parity with the U.S. dollar on Aug. 3 for the first time in 11 weeks and has traded beyond that every day since.

Resistance Levels

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 yesterday. Support is where sell orders may be clustered.

Canadian factory sales unexpectedly dropped in July, falling to the lowest since August, as investors worry that global weakness is undermining the country’s recovery. Sales fell 1.5 percent, the biggest one-month drop since January, to C$48.3 billion, Statistics Canada said yesterday in Ottawa. Economists in a Bloomberg News survey with 21 responses forecast a 0.4 percent gain.

Finance Minister Jim Flaherty said yesterday that the Canadian government is prepared to take additional measures to bolster the recovery if needed following stimulus in the U.S.

‘Economic Success’

“We’re always flexible and pragmatic,” Flaherty told reporters in Oshawa, Ontario. The government is closely monitoring the country’s unemployment rate, he said.

Recent gains in the country’s currency reflect in part Canada’s economic success, he said, adding he’s always worried about sudden changes in the value of the Canadian dollar. Canada’s fiscal and economic fundamentals “are sound and to some extent that’s reflected in our currency, in which people around the world have some faith.”

Canadian bonds fell, with the yield on the 10-year benchmark rising 12 basis points, or 0.12 percent to 1.97 percent. The 2.75 percent security fell C$1.07 to C$106.87 this week. Thirty-year bonds declined as the yield on the 30-year security advanced 11 basis points to 2.54 percent.

Crude oil for October delivery advanced 69 cents, or 0.7 percent, to $99 a barrel on the New York Mercantile Exchange yesterday, the highest settlement since May 3. Futures touched $100.42 in intraday trading.

The Standard & Poor’s 500 Index gained 1.9 percent after the equity benchmark yesterday rallied to its highest level since 2007 following the Fed decision on Sept. 13. The MSCI Emerging Markets Index jumped 4.7 percent.

“The longer that the U.S. keeps their interest rates low, two things happen,” Tim Gardiner, managing director at TD Securities Inc., said in a phone interview from Toronto. “One, the opportunity cost remains low and secondly for people who don’t operate in U.S. dollars, the U.S. dollar has weakened which means things like gold become cheaper. That will lead to increased demand, fueling commodity-linked currencies like Canada’s.”

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