Canadian Dollar Gains as Optimism Trumps Cliff Concern

Canada’s dollar had the biggest intraday jump in almost two weeks against its U.S. counterpart amid investor optimism about the country’s economic prospects even with the risk that the nation’s largest trading partner may enter a recession.

The Canadian currency, called the loonie for the image of the bird on the C$1 coin, fluctuated after U.S. lawmakers left for the Christmas holiday with only a week remaining to avoid automatic tax increases and spending reductions. The measures, set to take effect Jan. 1, might trigger an economic contraction. Even with the U.S. budget debate, figures released late last week show traders remain favorable on the longer-term prospects of the Canadian currency.

“Friday’s CFTC data suggested there was build in the net-long CAD position, so still sentiment is bullish,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by telephone from Toronto. “However, the very-near-term risk is certainly fiscal-cliff negotiations, and then the holiday-type less-liquid markets.”

The loonie gained as much as 0.3 percent, the most since Dec. 12, to 99.07 cents per U.S. dollar before trading little changed at 99.30 cents at 5 p.m. in Toronto. One Canadian dollar buys $1.0071.

Canada’s benchmark 10-year government bonds fell, pushing yields up one basis point, or 0.1 percentage point, to 1.82 percent. The 2.75 percent security due in June 2022 declined 13 cents to C$108.05.

Crude oil, the nation’s biggest export, fell 0.1 percent to $88.61 a barrel in New York, and the Standard & Poor’s 500 index of stocks ended the day down 0.2 percent.

Dollar Bets

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 74,278 on Dec. 18, compared with net longs of 62,533 a week earlier, figures from the Washington-based Commodity Futures Trading Commission showed Dec. 21.

The loonie’s drop below 99.05 cents per U.S. dollar last week may signal Canadian currency reached a high this month and more losses are to come, according to Shaun Osborne, chief currency strategist at Toronto-Dominion Bank.

“We’ll see C$1.03 by the end of the first quarter,” Osborne said by phone from Toronto. “Which is definitely more bearish than the market.”

The Canadian dollar has declined against the majority of its global peers this quarter on signs the economy is slowing and concern over the U.S.’ economic prospects. Canada’s gross domestic product rose 0.1 percent in October, after stalling in September and shrinking 0.1 percent in August.

Housing Outlook

The housing boom that helped power Canada out of 2009’s recession showed signs of fading with housing starts falling for a third month in November and existing home sales falling for a second month. Consumer debt, which Bank of Canada Governor Mark Carney has characterized as a danger to the economy rose in the third quarter, with the ratio of debt to disposable income reaching a record 164.6 percent from 163.3 in the previous three-month period.

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