Canadian Dollar Rises as Housing Increases More Than Forecast

The Canadian dollar rose against the majority of its most traded peers as new-home construction increased at the fastest pace in more than a year in May, adding to evidence the housing market is regaining momentum.

The currency was little changed against its U.S. counterpart after its biggest gain in a year and a half versus its U.S. peer last week as a surge of hiring in construction led to Canada posting its biggest jobs gain in a decade in May. Canadian housing starts were 200,178 units at a seasonally adjusted annual pace in May, according to the Ottawa-based Canada Mortgage & Housing Corp. Policy makers have taken steps in the past year to head off a housing bubble.

“It’s really hot data, but you had really hot employment data too, so when you combine the two, it’s hard to call it a bubble,” said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal by phone from New York. “I would say CAD is just quietly bid here.”

The loonie, as the Canadian dollar is known, was little changed against its U.S. peer at C$1.0194 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 98.10 U.S. cents.

Market Levels

The Canadian dollar is trading above its 50-day moving average of C$1.0205 per U.S. dollar and below its 100-day moving average of C$1.0174. When a currency crosses a moving average some traders take it as a sign the currency has momentum to continue the move.

Canada’s 10-year government bonds fell, with yields rising six basis points, or 0.06 percentage point, to 2.20 percent. The

1.5 percent note maturing in June 2023 declined 48 cents to C$93.77.

Crude oil, Canada’s largest export, fell 0.3 percent to C$95.76 per barrel and the Standard & Poor’s 500 Index of U.S. stocks was little changed. The discount Canadian oil producers face compared to the U.S. benchmark narrowed to $12.75 per barrel, the least since April.

The cost to insure against declines in the Canadian dollar versus its U.S. peer fell to its lowest point in more than a week. The one-month so-called 25-delta risk reversal rate fell to 1.43, its lowest level since May 31. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Trading Range

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart traded at 7.39 percent, its lowest point in three weeks. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Housing-market data are showing few signs of a sharp correction even amid warnings from analysts and policy makers that a bubble may have been forming. Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year on concern that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

“It doesn’t surprise me that the initial reaction to something like that is positive,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto. “If you look at it in the medium term, this could be problematic for the economy and problematic for policy makers. Growth in residential investment is not the kind of growth our economy needs, it’s not the kind of growth policy makers are looking for.”

Housing Construction

Home construction, which helped lift Canada’s economy out of recession, has been a drag on growth over the past year, according to Statistics Canada data. Construction fell in the first quarter at an annualized 4.7 percent pace, the third-straight drop, the Statistics Agency reported May 31.

Economists forecast a reading of 179,100 housing starts, according to the median of 18 responses to a Bloomberg News survey.

The Canadian dollar has fallen in the past month along with the currencies of its commodity-exporting cousins Australia and New Zealand among a basket of 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The loonie has declined 0.9 percent, trailing the 6.1 percent and 5.2 percent drops in the Australian and New Zealand dollars. All other currencies in the index have gained, led by the Japanese yen’s 3.3 percent increase.

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