Canada Dollar Rises to 4-Week High on Rate-Increase Speculation

The Canadian dollar touched its highest point in four weeks against its U.S. peer as signs of growth in the North American economy boosted bets the Bank of Canada will raise interest rates earlier than expected.

The currency strengthened for the fifth time in six days against the greenback as retail sales in the U.S., Canada’s biggest export market, rose more than forecast in May. Canada posted its strongest job gains in more than a decade last month and home construction rose the most in 13 months, driving expectations to the highest in more than a year the central bank will raise rates. Stocks and oil, Canada’s largest export, climbed.

“This all really stems from last Friday’s stellar jobs report moving forward -- we’re starting to hear rumors the Bank of Canada might pull the trigger sooner than expected on a rate hike,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western union Co., said by phone from Washington. “The loonie is enjoying a sea change in sentiment over the last few sessions.”

The loonie, as the Canadian dollar is nicknamed, rose 0.5 percent to C$1.0159 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0150 per U.S. dollar, its highest point since May 16. One loonie buys 98.44 U.S. cents.

Bonds, Oil

Canada’s benchmark 10-year government bonds rose, with yields falling seven basis points, or 0.7 percentage point, to 2.14 percent. The 1.5 percent security maturing in June 2023 gained 61 cents to C$94.33.

Futures on crude oil added 0.9 percent to $96.73 per barrel and the Standard & Poor’s 500 Index of U.S. stocks gained 1.5 percent.

The rate for the one-year forward overnight index swap, or OIS, was 1.35 percent, or 35 basis points more than the Bank of Canada’s target rate, near the 1.42 percent level reached June 10, the most since May 2012. The measure, which shows the market’s expectation for the one-year average central-bank rate beginning in one year’s time, was predicting a rate cut last June.

The Bank of Canada, whose key interest rate of 1 percent is the highest among the Group of Seven nations, is the only central bank among them with a leaning, or bias, toward higher rates. New central-bank Governor Stephen Poloz reiterated that stance in his first public comments on June 6.

‘Rate Hike’

“After some recent data in Canada, we’re pricing in a rate hike a little bit sooner than we thought,” said David Bradley, director of foreign-exchange trading at Bank of Nova Scotia’s Scotia Capital Inc., by phone from Toronto. “That’s probably helping the Canadian dollar.”

The JPMorgan G7 Volatility Index reached 11.2 percent for a second day, the highest level since June 2012.

U.S. retail sales rose 0.6 percent, the biggest increase in three months, following a 0.1 percent gain in April, Commerce Department figures showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.4 percent advance.

The loonie gained with Australia’s dollar as that nation unexpectedly boosted payrolls in May, adding 1,100 new jobs in May compared to a forecast for a 10,000 job decline in a Bloomberg survey of 25 economists. The jobless rate fell to 5.5 percent from a revised 5.6 percent in an economy that’s been driven by investments in resources to meet Chinese demand.

Haven Flows

“There’s been marginal out-performance for the Canadian dollar on the back of strength in Australia, as well as safe-haven flows,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “There’s an overall offer to the U.S. dollar against risk-related currencies, such as the Japanese yen and the Australian dollar.”

The cost to insure against declines in the Canadian dollar versus its U.S. peer fell to its lowest point in five weeks. The one month so called 25-delta risk reversal rate fell as low as 1.37 percent, the least since May 14.

The Canadian dollar has dropped 1.9 percent in the past month against nine developed-nation peers tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has dropped 1.2 percent and the Australian currency declined 4.8 percent to lead decliners. The yen has surged six percent to pace gainers.

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