Canadian Dollar Strengthens as Chinese Exports Rise

The Canadian dollar rose to a three-week high against its U.S counterpart after China’s exports topped estimates, boosting speculation a strengthening economy will drive demand for Canada’s commodities.

The loonie, as the currency is nicknamed, briefly pared gains on signs the Canadian housing market was cooling faster than forecast. Bank of Canada Senior Deputy Governor Tiff Macklem said the “near-term” momentum of the country’s economy appears to be “softer” than projected, even as activity is forecast to pick up this year. Canada’s dollar fell the most in almost three months versus the euro after the region’s central bank held its interest-rate target unchanged.

“As long as commodity prices stay relatively high, our economy will be OK,” Aaron Fennell, a futures specialist a Scotiabank’s ScotiaMcLeod unit in Toronto said by phone from Toronto. “The housing situation is a risk for Canada, but I don’t think we’re going to see the chaos we saw in the United States.”

The Canadian dollar rose 0.5 percent to 98.32 cents per U.S. dollar at 5:10 p.m. in Toronto, reaching the strongest level since Dec. 18. One Canadian dollar buys $1.0171. It weakened 1.1 percent to C$1.3050 per euro, touching the largest loss since Oct. 16.

Oil, Stocks

Crude oil, the nation’s largest export, rose 0.9 percent to $93.92 a barrel in New York. The Standard & Poor’s 500 Index rose 0.7 percent while the S&P/TSX Composite Index, the benchmark Canadian equity gauge, added 0.8 percent.

Canada’s benchmark 10-year bond fell, with yields rising five basis points, or 0.05 percentage point, to 1.95 percent. The 2.75 percent note due in June 2022 dropped 44 cents to C$106.79.

The Canadian government sold C$3.4 billion ($3.44 billion) of 1.25 percent notes due in March 2018 yesterday, drawing an average yield of 1.494 percent. The Bank of Canada will sell C$3.3 billion of notes maturing in May 2015 on Jan. 16.

Canadian construction permits in November fell 17.9 percent to C$6.2 billion, the lowest level since January 2012, Statistics Canada said today in Ottawa. Increases in home prices slowed in November, a separate survey showed. The Bank of Canada has said a rapid drop in house prices is a major threat to the Canadian economy, where household debt to disposable income reached a record in the third quarter of last year.

China’s overseas sales rose 14.1 percent in December from a year earlier, almost triple the 5 percent gain forecast in a Bloomberg analyst survey, data showed today.

Rate Outlook

“Commodity currencies did well overnight, the Chinese data, with the exports jumping up the economy definitely looks like it’s rebounding,” Chris Gaffney, co-chief investment officer at EverBank Wealth Management, said by phone from St. Louis. “While growth is still not back in the double digits we believe that it will get back over sever percent to eight percent and I believe that’s got to put some wind back in the sails of the commodity currencies and Canada’s certainly benefited from that.”

Amid the improving outlook for the global economy and signs of a strengthening job market economists have brought forward estimates of a Bank of Canada rate increase into 2013.

The central bank will raise its 1 percent benchmark interest rate by one quarter of a percentage point by the end of this year, according to the median estimate of 23 economists surveyed by Bloomberg News from Jan. 4 to Jan. 9. In last month’s survey, economists forecast such an increase in the first quarter of 2014.

In a speech today in Kingston, Ontario, Macklem said housing is beginning to decline in line with projections and exports are being restrained by weak demand and “competitiveness challenges.” Economic growth slowed in the third quarter because of “transitory disruptions” in the energy sector, he said.

Momentum Watch

“We continue to expect economic activity to pick up through 2013, but near-term momentum now appears to be slightly softer than previously anticipated,” Macklem said, according to a copy of the speech posted on the central bank’s website.

The loonie extended losses versus the euro after the ECB held its benchmark interest rate at 0.75 percent and President Mario Draghi said the euro-area economy will recover this year as the region’s bond market stabilizes.

“I think doing nothing, keeping rates and spreads where they are, is short-term bullish for the euro,” Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp., said by phone from Toronto. “History will tell you it should head north, and Canada should do better on the crosses, as people will gravitate towards risk a little more.”