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Canada’s Dollar Strengthens as Fed-Chief Nominee Pushes Stimulus

Canada’s dollar gained the most in a month after Federal Reserve Chairman-nominee Janet Yellen signaled she’ll push the stimulus that has boosted global risk appetite to ensure a robust recovery in the U.S. economy.

The currency rose from a 10-week low as Yellen testified Nov. 14 at a Senate Banking Committee hearing on her nomination to run the Fed. Stronger-than-forecast U.S. jobs growth last month fueled bets the central bank would soon slow bond purchases. The currency’s gains were limited as oil, Canada’s biggest export, fell for a sixth week, the longest stretch in 15 years. Inflation slowed in October, data next week may show.

“Her comments were certainly dovish, as people expected they would be, and I think that’s seen the U.S. dollar get hurt and Canada’s rallied a little bit,” Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “The market’s kind of seesawed back and forth between tapering in December or waiting until the new year, and I think certainly waiting till the new year is the most likely scenario now.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, gained 0.4 percent to C$1.0439 per U.S. dollar this week in Toronto, the most since Oct. 18. It slid to C$1.0526 per U.S. dollar on Nov. 14, the weakest level since Sept. 4. One Canadian dollar buys 95.80 U.S. cents.

Lower Volatility

Implied volatility for one-month options on the U.S. dollar against its Canadian counterpart fell to 5.16 percent yesterday, the lowest intraday level since Oct. 23. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.49 percent.

Canada’s government bonds rose for the first week since October, pushing yields on the benchmark 10-year security down five basis points, or 0.05 percentage point, to 2.56 percent. The price of the 1.5 percent debt maturing in June 2023 increased 39 cents to C$91.10.

Two-year bond yields fell one basis point to 1.12 percent. The Bank of Canada will auction C$3.3 billion ($3.2 billion of two-year debt Nov. 20. The 1.25 percent securities are due in February 2016.

Fed Vice Chairman Yellen, speaking to lawmakers at a confirmation hearing on her nomination as chairman, signaled her commitment to using bond purchases to strengthen the American economy and drive down the nation’s 7.3 percent jobless rate. The U.S. is Canada’s biggest trade partner.

“Yellen was true to her form and was a dove,” said David Tulk, chief macro-strategist at Toronto-Dominion Bank, by phone from Toronto. “Those tapering expectations can just kind of be put to the side for now.”

Fed Purchases

The U.S. central bank buys $85 billion of bonds a month to depress borrowing costs and spur the world’s biggest economy, making higher-yielding assets such as Canada’s dollar more attractive in the process. The strategy also tends to debase the American currency.

Fed Chairman Ben S. Bernanke said in June policy makers would probably taper purchases later in 2013 and end them next year if the economy improved significantly. They refrained in September and October from reducing the buying, saying they wanted more evidence of progress. U.S. employers added 204,000 jobs in October, versus a Bloomberg forecast of 120,000, the Labor Department reported on Nov. 8.

Crude oil for December delivery slid 0.8 percent to $93.84 per barrel and touched $92.51, the lowest intraday level since May 31. It has fallen every week since Oct. 4, the longest losing streak since December 1998.

Factory Sales

The loonie gained versus the U.S. currency yesterday after Statistics Canada reported that manufacturing sales rose 0.6 percent to C$49.9 billion, the highest since June 2012. Economists in a Bloomberg survey forecast a 0.5 percent gain.

The Bank of Canada has said that business investment and exports remain weak in an economy led by consumer spending, as companies wait for clearer signs of expansion abroad.

Futures traders decreased their bets that the Canadian dollar will decline against its U.S. peer, 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 a decline in the loonie versus those on a gain -- so-called net shorts -- was 16,092 on Nov. 12, compared with net shorts of 18,002 a week earlier.

Economists reduced their Canadian bond-yield forecasts by the most in seven months after the nation’s central bank joined global counterparts Oct. 23 in renewing efforts to spur growth amid sluggish inflation.

In a policy statement after he left leave the benchmark interest rate unchanged at 1 percent, Bank of Canada Governor Stephen Poloz dropped language in place for more than a year about the need to raise interest rates, citing low inflation.

‘Really Torn’

The nation’s benchmark 10-year bond will yield 3.06 percent by October 2014, according to the median of 19 forecasts in a Bloomberg News survey taken between Nov. 8 and Nov. 13. That’s 14 basis points lower than the October median and the biggest cut to a year-ahead forecast in the monthly surveys since April.

Forecasters now see the Bank of Canada maintaining its benchmark rate until the second quarter of 2015, one quarter longer than the previous survey.

“Canada is really torn between an improving U.S. economic outlook versus a central bank that is likely to be neutral to dovish,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto

The nation’s consumer-price index rose 0.9 percent last month from a year earlier, trailing September’s 1.1 percent, economists in a Bloomberg survey forecast before the data are released on Nov. 22. The Bank of Canada’s target range for inflation is 1 percent to 3 percent.

“We’ve obviously been there before,” Sutton said. “However, it just opens the door to an even more dovish Bank of Canada, which would be Canadian-dollar negative.”

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