Canadian Dollar Rallies Most Since 2010 on Stimulus

Canada’s dollar gained the most in two years against its U.S. peer this quarter after stimulus measures by governments worldwide fueled the advance of stocks and oil, spurring investor demand for higher-yielding assets.

The Canadian currency also advanced this month as the Federal Reserve announced a plan for open-ended debt buying to spur economic growth, which may debase the U.S. currency. Canadian government bonds dropped in the quarter as European Central Bank President Mario Draghi unveiled an unlimited debt-buying program, sapping demand for haven assets. Canadian employment growth is forecast to slow in September, according to a Bloomberg survey before the report next week.

“This has been the quarter of central banks fighting back and policy makers delivering quite impressive promises -- and, in some cases, some impressive stimulus,” Eric Lascelles, chief economist in Toronto at Royal Bank of Canada’s Global Asset Management unit, said yesterday in a phone interview. “There has been progress in Europe as well -- I definitely feel better about the world than I did a quarter ago. The story is one in which commodity currencies in particular have moved up.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, rose 3.4 percent in the quarter to 98.37 cents per U.S. dollar, the biggest gain since the quarter ended March 2010. It fell 1.8 percent in the previous quarter. Canada’s dollar added 0.3 percent this month and declined 0.7 percent on the week. One Canadian dollar buys $1.0166.

The Standard & Poor’s Index posted a 5.8 percent gain this quarter following last quarter’s loss of 3.3 percent. Futures for crude oil, Canada’s largest export, gained 8.5 percent this quarter, the most this year.

Longs Gain

Futures traders decreased their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 105,346 on Sept. 25, compared with net longs of 111,881 a week earlier. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Tuesday.

Canadian employment is forecast to rise by 10,000 this month after a 34,300 gain the prior month. The jobless rate is expected to hold steady at 7.3 percent, according to another survey.

Bonds Decline

Bank of Canada Governor Mark Carney on Sept. 5 held his key lending rate at 1 percent, where it’s been since September 2010, the longest unchanged period since the 1950s. Carney reiterated that an increase “may become appropriate” as domestic spending props up an economic recovery restrained by weak global demand for exports.

Government bonds fell in the quarter, with yields on the benchmark 10-year security gaining five basis points, or 0.05 percentage point, to 1.73 percent after touching an all-time low of 1.57 percent on July 23. The 2.75 security maturing in June 2022 declined 72 cents to C$109.05.

Debt issuance by Canada’s provinces fell to the lowest level this quarter since the 2008 collapse of Lehman Brothers Holdings Inc. as local officials make progress on promises to close record deficits.

Canadian governments and agencies issued C$19.3 billion ($19.7 billion) of bonds since June when issuance slowed to C$14.3 billion, according to data compiled by Bloomberg. Provincial debt handed investors a gain of 1.4 percent this quarter, down from 5.9 percent a year earlier, Bank of America Merrill Lynch index data show.

‘Stimulus Expectations’

Ontario, Canada’s most populous province, sold an additional C$600 million of 3.5 percent notes due in June 2043, yielding 97 basis points more than comparable government debt yesterday. The size of the issue is now C$5.9 billion, according to data compiled by Bloomberg.

Frustrated by the slow pace of the U.S. recovery, Fed Chairman Ben S. Bernanke announced Sept. 13 that the central bank would likely keep rates at a record low and purchase $40 billion of mortgage bonds per month in a third round of so called quantitative easing, or QE3, until the jobs shows “sustained improvement.”

“All the movement this quarter has been about stimulus expectations and, eventually, realization of stimulus measures around the world,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, said yesterday in a phone interview. “With the central banks having all the cards on the table, the focus is back on ‘What does that mean for growth for the world economy?’ ”

‘Massively Lower’

The ECB said it may buy bonds with maturities as long as three years on the secondary markets of countries that ask Europe’s bailout fund to purchase their debt on the primary exchanges. Europe’s central bank said it planned to sterilize its bonds purchases, taking out as much liquidity as it injects.

Spain’s government bonds rose on the quarter, with the 10-year yield falling 100 basis points to 5.9 percent, as the nation held off from seeking a bailout that would enable the central bank to buy its debt. A stress test of Spain’s banks showed a capital deficit of 59.3 billion euros ($76.3 billion), less than previously estimated.

“Despite the slightly greater concern over Europe over the past few weeks, this quarter has been a good one for policy makers and it’s been a great one for Europe,” RBC’s Lascelles said. “You can see it in Spanish bond yields being massively lower than at their worst.”

Canada’s dollar has strengthened 1.7 percent this year against nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The greenback has dropped 2.5 percent, with the Japanese yen tumbling 4 percent to lead decliners. The New Zealand dollar’s 4.7 percent rise leads gainers.

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