Canada Dollar Advances as Fed Maintains Asset-Purchase Program

The Canadian dollar gained against its U.S. peer for the first time in three days after the Federal Reserve maintained stimulus measures, bolstering growth expectations in the nation’s biggest trading partner.

Canada’s currency fluctuated earlier as commodities rose and European policy makers weighed how far to push Cyprus after the island nation rejected an unprecedented levy on bank deposits, jeopardizing a financial bailout. The so-called loonie advanced against the majority of its 16 most-traded peers before a report tomorrow forecast to show Canada’s retail sales increased in January after contracting the prior month.

The statement “shows how Fed doves are firmly in control and it doesn’t change investors expectations,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by phone from Washington D.C. “Some investors had expected maybe some talk of the Fed perhaps unwinding some of their bond purchases earlier than expect. And, since that didn’t come to fruition, that’s helped other currencies -- like the loonie -- gain against the greenback.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, climbed 0.1 percent to C$1.0260 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 97.47 U.S. cents.

Debt Auction

Canada’s benchmark 10-year government bond fell, with yields increasing five basis points, or 0.05 percentage point, to 1.86 percent. The 2.75 percent security that matures in June 2022 declined 41 cents to C$107.46.

The Bank of Canada auctioned C$3.3 billion ($3.2 billion) worth of two-year government notes today at an average yield of 0.985 percent, lowered than the 1.168 percent yield from the Feb. 13 auction of two-year notes. The offering drew C$8.62 billion in bids.

Implied volatility for three-month options on the greenback versus the Canadian dollar touched 6.1, the lowest level since Feb. 19, and is down 13 percent this month. Implied volatility signals the expected pace of currencies swings and is quoted by traders to set prices. Lower volatility correlates with a stronger Canadian dollar versus its U.S. counterpart.

Futures on crude oil jumped 0.9 percent to trade at $93.96 a barrel in New York after a decline of 1.7 percent yesterday, the biggest one-day drop on a closing basis in four weeks. The Standard & Poor’s GSCI Index of 24 raw materials gained 0.9 percent. Raw materials, including oil, account for almost half of all of Canada’s exports.

Federal Reserve

The loonie rose after the central bank led by Chairman Ben S. Bernanke said it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. The U.S. is Canada’s largest trading partner.

The purchases will remain divided between $40 billion a month of mortgage-back securities and $45 billion a month of Treasury debt. The Fed said the purchases will continue until “the outlook for the labor market has improved substantially in a context of price stability” and that it will continue to reinvest maturing securities.

The loonie pared gains earlier as Germany’s Merkel said any solution in Cyprus can’t be based “on a banking model that clearly isn’t sustainable.” The ECB yesterday reaffirmed its commitment to offer funding to Cyprus “within the existing rules,” after Cypriot lawmakers rejected a levy on bank deposits.

Cyprus Turmoil

“Merkel’s statements led to a more risk-off sentiment, which has driven U.S. dollar strength, more than Canadian dollar weakness,” said David Doyle, a strategist at Macquarie Capital Markets in Toronto. “The loonie is in wait-and-see mode.”

Canada’s retail sales jumped 0.9 percent in January after dropping 2.1 percent in December, the biggest decline in almost three years, according to a Bloomberg survey of 20 economists. Retail sales increased 0.2 percent last January. Statistics Canada will release the report on March 21.

The loonie has lost 2.2 percent during the past six months against nine developed nation peers tracked by the Bloomberg Correlation Weighted Indexes. The only currencies that have fallen off more are the yen and the pound, at 18 percent and 4.7 percent. The U.S. dollar has gained 3.3 percent.