Canadian Dollar Touches Highest Since June on Growth Optimism

The Canadian dollar strengthened to the highest level since June against its U.S. counterpart this month amid optimism the economy is recovering from a second-quarter slowdown.

The currency traded in its narrowest weekly range since March during the past five days amid a political standoff in the U.S. that could cause the government of Canada’s largest trading partner to shut down, harming the surge in exports the Bank of Canada is expecting to drive growth. A report next week will show gross domestic product expanded 0.5 percent in July, after contracting the same amount the previous month, according to the median estimate of a Bloomberg survey of 15 economists.

“Assuming there is an eleventh hour agreement, I think we can still look ahead to an improvement in U.S. growth and I think that will see through into better demand,” Jane Foley, senior currency strategist at Rabobank International, said by telephone from London. “There is now also the anticipation in the market right now that the Bank of Canada will be one of the first few G-10 central banks to hike interest rates, and that’s something which will underpin the Canadian dollar.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.02 percent this week to C$1.0306 per U.S. dollar. One loonie buys 97.03 U.S. cents. The loonie is up 2.1 percent in September.

The currency touched C$1.0182 per U.S. dollar on Sept. 19, a three-month high, after the Federal Reserve unexpectedly maintained the monetary stimulus its used to lower borrowing costs, easing concern that higher U.S. interest rates will slow global growth.

Oil Spread

Canada’s benchmark 10-year government bonds rose, with yields falling 14 basis points, or 1.4 percentage point, this week to 2.55 percent. The 1.5 percent bond maturing in June 2023 gained C$1.10 to C$91.03.

Futures on crude oil, Canada’s largest export posted their biggest monthly loss in eight, falling 4.5 percent to $102.81 per barrel.

Lack of pipeline infrastructure connecting to international markets has meant Canada’s oil has faced a discount compared with the U.S. benchmark. The discount Canada’s benchmark crude oil-grade, Western Canada Select, faced to West Texas Intermediate, it’s U.S. peer, was at $31.75 per barrel yesterday, the most since Jan. 30.

Canadian Prime Minister Stephen Harper said during a trip to New York Sept. 26 that his government will continue to push for approval of the Keystone XL pipeline, which would transport crude from Alberta to the Gulf of Mexico, even if President Barack Obama rejects the project. Oil is Canada’s biggest export.

Energy Strategy

“The uncertainty regarding Keystone will play a role as well on that oil differential,” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by phone from Quebec City. “A lot of things influence the Canadian dollar, including the prospect of economic growth, but including all this discount regarding oil price and the strategy regarding energy in North America.”

Canadian economic growth has been stronger than forecast as of late, with employment growth in August coming in three times greater than the average analyst forecast, building permits for July rising to a record and retail sales in the same month exceeding analyst estimates, according to data compiled by Bloomberg.

Partisan Politics

The loonie traded in a range of 0.34 Canadian cents this week, the least since the five days ended March 29, with efforts to pass legislation that would keep the U.S. government funded past Sept. 30 deadlocked as Republicans insist any new budget remove funding for President Obama’s signature health care law and Democrats seek to preserve it.

A government shutdown may reduce fourth-quarter economic growth by as much as 1.4 percentage points in the U.S., Canada’s largest trading partner, according to Moody’s Analytics Inc.

The Canadian dollar has lost 0.2 percent this month against nine developed market peers tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has fallen 2 percent while the Australian currency has gained 2 percent.

“It will tend toward weakness, I think, the Canadian dollar, if we continue to see this bipartisan fiscal stalemate in the U.S.,” said John Curran, a senior vice president at CanadianForex Ltd., an online foreign exchange dealer, said by phone from Toronto. “All this partisan politics doesn’t go over well in the market.”

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