Canadian Dollar Reaches 7-Week High on Demand for Riskier Assets

The Canadian dollar reached its highest level in seven weeks against its U.S. counterpart as appetite for risk assets outweighed the deteriorating economic outlook in the commodity-exporting nation.

The currency strengthened as a report showed a 0.2 percent February gain in new home prices, up from a 0.1 percent rise the month before. Slowing growth is prompting economists to cut forecasts on two-year government bonds the most in more than a year as they push out projections for Bank of Canada interest-rate increases, according to a Bloomberg survey. U.S. stocks rose for a fourth day as U.S. jobless claims dropped more than forecast. The currencies of Canada’s commodity-exporting peers, Australia and New Zealand, rose as lending in China expanded more than analysts projected.

“We have a lot of bad news baked into Canada, but we don’t have a lot of good news, so I think we’ve already seen the bad-news story play out in terms of what’s been priced in,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “There are a lot of things that should end up supporting the Canadian dollar as we get into next year and even late this year, that’s everything from a housing market that doesn’t collapse as some people feel to oil pricing that’s already turned much more favorably for the Canadian economy.”

Market Prices

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.4 percent to C$1.0105 per U.S. dollar at 5:03 p.m. in Toronto. It earlier touched C$1.0084 per U.S. dollar, its strongest level since Feb. 18. One loonie buys 98.92 U.S. cents.

The last time the Canadian dollar closed below parity with the greenback was Feb. 7.

Canada’s benchmark 10-year bonds rose, pushing the yield down two basis points, or 0.02 percentage point, to 1.78 percent. The 1.5 percent security maturing in June 2023 rose 21 cents to C$97.40.

Futures of crude oil, the country’s largest export, fell 1.2 percent to $93.48 per barrel and the discount Canada faces for its heavy crude oil to the North American benchmark was $13.75, almost its narrowest since October. Refinery shutdowns and lack of infrastructure for bringing the oil to market caused the discount to widen to a record $42.50 on Dec. 14.

The Standard & Poor’s 500 Index of U.S. stocks rose 0.4 percent with stronger-than-forecast economic data from both the U.S. and China.

China Trends

March new local-currency lending in China was 1.06 trillion yuan ($171 billion), the People’s Bank of China said today in Beijing. That compares with the 900 billion yuan median estimate in a Bloomberg News survey of 34 economists and 620 billion yuan in February. M2, China’s broadest measure of money supply, rose 15.7 percent, compared with the median forecast for 14.6 percent.

Jobless claims in the U.S. decreased by 42,000 to 346,000 in the week ended April 6, from a revised 388,000, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a drop to 360,000.

“All of those things generally have kept the equity markets well bid and that positive-risk background is typically dollar negative, which is Canadian-dollar positive,” said Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada in London.

Canada’s new home price index was boosted by the largest gain in Calgary in almost six years. Prices in the Alberta city grew 1 percent from January, the most since May 2007, because of higher labor and material costs, Statistics Canada said today in Ottawa. Prices in Regina, Saskatchewan, rose 1.4 percent.

Japan Policy

Bank of Japan Governor Haruhiko Kuroda, who took his post in March, said April 4 the central bank will double monthly bond buying to 7.5 trillion yen ($76 billion), while suspending a cap on holdings, helping to drive the currency to its lowest versus the U.S. dollar since 2009.

“I think you’re seeing some investor flows into Canada and out of some problematic areas, so money’s probably coming out of Japan and we have seen some come out of Europe, so the Canadian dollar is benefiting,” said Blake Jespersen, managing director of foreign exchange at Bank of Montreal, by phone from Toronto.

Options traders were paying less to insure against a decline in the loonie against the U.S. dollar. The three-month so-called 25-delta risk reversal rate fell to 0.99 percent after reaching 1.015 percent April 8, its highest point in three weeks. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Rates Outlook

The yield on Sept. 2013 bankers’ acceptances contracts, a barometer of short-term interest rates, has fallen five basis points since the beginning of February, indicating traders are paring bets on higher interest rates.

The Canadian dollar has gained 0.4 percent in the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has fallen 1.2 percent while other currencies of commodity exporting nations, the Australian and New Zealand dollars, have gained 1 percent and 3.6 percent respectively.

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