Canadian Dollar Gains as Stimulus Bets Fuel Risk-Asset Appetite

The Canadian dollar rose to a two-week high versus its U.S. peer amid gains in crude oil, the country’s largest export, and speculation the U.S. will maintain stimulus and the European Central Bank will cut interest rates.

The currency fell against the dollars of fellow commodity exporters Australia and New Zealand before data tomorrow forecast to show Canada’s gross domestic product grew 0.2 percent in February, matching January’s pace. Italy ended a two-month political stalemate as Prime Minister Enrico Letta was sworn in. Investors bet the Federal Reserve will decide this week to keep buying bonds under quantitative easing and the ECB on May 2 will lower its benchmark interest rate. Stocks rose.

“Ahead of the Fed and ahead of the ECB, we see some strength both in the euro and the Canadian dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “For the Canadian dollar, one can look at the pickup in crude-oil pricing as well as the pickup in equities, along with the inference the Fed will remain steady on quantitative easing.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, appreciated 0.5 percent to C$1.0112 per U.S. dollar at 5 p.m. in Toronto and touched C$1.0108, its strongest level since April 12. One loonie buys 98.84 U.S. cents.

The Australian dollar rose 0.2 percent to C$1.0466 and the New Zealand dollar gained 0.5 percent to 86.63 Canadian cents.

Canada’s benchmark 10-year government bonds were little changed, yielding 1.7 percent. The price of the 1.5 percent security maturing in June 2023 increased 4 cents to C$98.17.

Oil Rises

Futures on crude oil gained 1.5 percent to $94.42 a barrel in New York. The Standard & Poor’s 500 Index of U.S. stocks advanced 0.7 percent, and Canada’s benchmark S&P Toronto Stock Exchange Index added 0.8 percent.

The cost to insure against declines in the Canadian dollar against its U.S. peer reached the lowest level in two weeks. The three-month so-called 25-delta risk reversal rate ended the day at 1.0075 percent, the lowest point since April 12. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

“There’s no particular reason for the loonie to out-perform, I just think it’s going higher with all commodity currencies and risk assets generally,” said Greg T. Moore, a currency strategist at Toronto-Dominion Bank, by phone from Toronto. “The positioning doesn’t really reflect what’s going on with the fundamentals, and that reflects this GDP print.”

Canadian GDP

Canadian GDP grew 0.2 percent in February, the same as a month earlier, economists surveyed by Bloomberg forecast before the nation’s statistics agency reports the data tomorrow.

GDP in the U.S., Canada’s biggest trade partner, grew at a 2.5 percent annual rate last quarter, less than the 3 percent estimated by economists, the Commerce Department said April 26.

Household purchases in the U.S., which account for about 70 percent of the economy, rose less than forecast in March, adding 0.2 percent after a 0.7 percent gain the prior month, a Commerce Department report showed today in Washington.

The Fed, which meets April 30-May 1, is purchasing $85 billion of bonds a month to put downward pressure on borrowing costs to spur economic growth and lower unemployment.

The ECB will cut its record-low main refinancing rate by a quarter-percentage point to 0.5 percent, a Bloomberg survey of economists forecast.

‘Western Alternative’

“I think people looking to diversify out of the U.S., and looking for a North American or Western alternative, Canada still does hold up pretty well, despite mixed to weak economic numbers recently,” said Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce. “With the ECB potentially cutting rates by 25 basis points and removing the rate advantage over other currencies, I think Canada could be a beneficiary.”

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 5.81 percent, the lowest level since February. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

The loonie fell 1.3 percent in the past 12 months against nine developed-nation peers tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar gained 1.4 percent, New Zealand’s currency climbed 7.4 percent and the greenback rose 2.2 percent.

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