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Canadian Dollar Posts Three-Month Gain on U.S. Cliff Deal

The Canadian dollar rose the most in three months against its U.S. counterpart as the U.S. passed a deficit-reduction plan to avoid automatic austerity and head off the threat of recession in the nation’s largest trading partner.

The loonie, as the currency is nicknamed, strengthened against the majority of its most-traded peers as the budget deal passed in the U.S. Senate on New Year’s Eve cleared its last legislative hurdle before becoming law, ending the threat of $600 billion in automatic spending cuts and tax increases. Crude oil, the nation’s largest export, rose for a second day.

“I would say the fiscal cliff deal has taken away some tail risks, that would be falling into a government spending contraction induced recession,” Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “That’s supported oil, that’s supported commodities, and that’s in turn supported the Canadian dollar.”

The loonie advanced 0.9 percent to 98.49 cents per U.S. dollar at 5:04 p.m. Toronto time, after earlier making its largest intraday jump since Sept. 13. One Canadian dollar buys $1.0153.

Futures on crude oil added 1.3 percent to $92.97 per barrel in New York and the Standard & Poor’s 500 Index gained 2.5 percent.

Bonds Fall

Canada’s benchmark 10-year government bonds declined, with yields rising seven basis points, or 0.07 percentage point, to 1.87 percent. The 2.75 percent security maturing in June 2022 fell 64 cents to $107.58.

The nation’s corporate bonds topped government debt last year by the most since 2009, led by gains in public-private partnership securities issued to finance the construction of hospitals.

Health-care bonds returned 10.5 percent in 2012, the top performing Canadian corporate category, compared with returns on the broad corporate index of 6.5 percent, 2.4 percent for federal bonds and 3.1 percent for provincial bonds, according to Bank of America Merrill Lynch data. The firm’s Global Corporate Index made 11 percent.

“General risk sentiment is improving,” said David Watt, chief economist at HSBC Holdings Plc in Toronto. “The fiscal deal in the U.S., that’s been holding markets back, so the fact they got an agreement basically could take a source of uncertainty away from markets.”

Interest Rates

Trading in overnight index swaps shows investors see little chance of the Bank of Canada raising interest rates before July, according to data compiled by Bloomberg. The central bank has kept the benchmark rate at 1 percent since September 2010, the longest pause since the 1950s.

Implied volatility for three-month options on the U.S. dollar versus the loonie was 5.61 percent, below the one year average of 9.05. Implied volatility signals the expected pace of currency swings and is quoted and used by traders to set option prices.

The Canadian dollar traded stronger than its 50-, 100-, and 200-day moving averages, breaking technical levels that signal further strength.

“In the short term, I think we’ll see a lot of resistance at 98.25, so the U.S. dollar will find support at that level,” said Darren Richardson, senior corporate dealer at CanadianForex Ltd, by phone from Toronto. “We’ve got a lot of technical support there, previous highs from October, December was at 98.25 and that should hold in for today.”

The Canadian dollar has gained 0.5 percent in the past 12 months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The greenback has dropped 2.2 percent.

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