Canadian Dollar Rises Most This Month on Stimulus SpeculationChris Fournier
Canada’s dollar rose from the lowest level in two weeks and posted the biggest one-day gain this month on speculation central banks will consider increasing monetary stimulus to spur growth, boosting higher-risk assets.
The currency fell earlier to the lowest since July 12 on concern Europe’s debt crisis is worsening. European Central Bank council member Ewald Nowotny said there were arguments favoring giving the region’s rescue fund a banking license. Stocks and crude oil, traditional drivers for the currency, gained.
“People are hoping for more stimulus,” said John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, by phone from Toronto. “I don’t see it coming this year. There would have to be some drastic downturns in employment and growth scenarios for them to come out and act. People are going to be disappointed. Buy U.S. dollars.”
Canada’s currency, nicknamed the loonie, climbed 0.7 percent, the most since June 29, to C$1.0155 per U.S. dollar at 5 p.m. in Toronto. The currency is up 0.1 percent this month versus the greenback. One Canadian dollar buys 98.48 U.S. cents.
“There’s more positive sentiment,” Steve Butler, managing director in Toronto at Scotiabank, said by e-mail. “It’s giving the market hope that there will be some policy action, either in the U.S. or Europe or both.”
Butler said he bought Canadian dollars today as a “short-term play.” The loonie may weaken to between C$1.035 and C$1.040 per U.S. dollar eventually, while “on days like today, you can’t fight the herd,” Butler said.
Government bonds fell for the first time in four days. The benchmark 10-year yield rose two basis points, or 0.02 percentage points, to 1.59 percent, as the price of the 2.75 percent security due in June 2022 declined 17 cents to C$110.52.
Canada sold C$2.6 billion of 10-year bonds today at a yield of 1.705 percent. The securities have a coupon of 1.5 percent and mature in June 2023.
The sale drew bids of C$5.87 billion for a bid-to-cover -- the amount bid relative to the amount offered -- of 2.26 times. The previous auction of 10-year bonds, on June 6, drew an average yield of 1.765 percent and a bid-to-cover ratio of 2.37 times, according to Bank of Canada data.
The Standard & Poor’s 500 Index was little changed. Crude for September delivery rose as much as 1.2 percent to $89.16 in New York. Canada’s currency, which is up about 0.6 percent this year versus the greenback, tends to rise and fall with stocks and commodity prices.
Granting a banking license to the ESM would give it access to ECB lending, easing concern its 500 billion-euro cash reserves won’t be enough if Spain or Italy require aid amid the worsening debt crisis.
Nowotny’s comments “caused a spike in the euro and a risk rally in general,” said Blake Jespersen, managing director of institutional foreign-exchange sales in Toronto at Bank of Montreal, in an e-mail. “The Canadian dollar benefited from that.” Jespersen is “getting long U.S. dollars at C$1.0120 with an overall view that Canadian dollar gains are capped for the summer.” A long position is a bet that an asset will increase in value.
Investors are moving out of the euro and sterling into commodity currencies because the prospect of monetary stimulus and below-average volatility levels has cushioned them from the worst of the price declines in raw materials, according to Axel Merk, founder and president of Merk Investments LLC.
Among the 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, Canada’s dollar has gained 2.4 percent this year, lagging behind only the fellow resource-linked dollars of Australia, up 2.9 percent, and New Zealand up 3.5 percent.
“We dumped the euro and picked up some commodity currencies,” Merk said during a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Volatility has come down year-to-date. Central banks are hoping for the best, but planning for the worst, which means the commodity currencies, which ought to be more volatile, are less volatile.”
Implied volatility for one-month options on the Canadian dollar versus the greenback fell to 7.28 percent today, after falling to 6.22 percent at the end of last week, the lowest this year. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
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