Canadian Dollar Rises as Stimulus Pledges Support Export Markets

Canada’s dollar rose the first time in nine days as Federal Reserve Bank of Richmond President Jeffrey Lacker said he expects the U.S. expansion to remain “sluggish” for “a couple more years,” bolstering the case for sustained stimulus.

Canada’s dollar rose earlier with those of fellow commodities producers Australia and New Zealand after European Central Bank President Mario Draghi said the central bank “will stay accommodative for the foreseeable future” and Bank of England Governor Mervyn King said yesterday the slowing of asset purchases isn’t imminent, supporting export markets. The Bank of Canada remains the only Group of Seven central bank with a bias to raise interest rates.

“When you get through all the rhetoric, the Fed does put the data in the driver’s seat,” said David Tulk chief macro strategist at Toronto-Dominion Bank’s TD Securities unit by phone from Toronto. “People may be looking at the Fed being a bit more cautious in tapering, and looking at a bond market and a currency market that might have moved a bit too far, a bit too early.”

The loonie, as the Canadian dollar is nicknamed, rose 0.4 percent to C$1.0470 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 95.51 U.S. cents. The loonie touched C$1.0556 per U.S. dollar June 24, the lowest level since October 2011.

Canada’s dollar is down 0.9 percent this month, 2.9 percent this quarter and 5.3 percent this year.

Oil, Bonds

Futures on crude oil, Canada’s largest export, rose 0.2 percent to $95.46 per barrel in New York after declining as much as 1.7 percent. The Standard & Poor’s 500 Index of U.S. stocks gained 1 percent.

Canada’s 10-year benchmark government bonds rose, with yields falling four basis points, or 0.04 percentage point, to 2.50 percent. The 1.5 percent security maturing in June 2023 added 35 cents to C$91.31.

The difference between two-year bonds in Canada and the U.S. is 85 basis points, the narrowest in two weeks, data compiled by Bloomberg shows.

Lacker said today’s downward revision in U.S. growth estimates was in line with his outlook of about 2.25 percent growth next year. Gross domestic product expanded at a 1.8 percent annualized rate from January through March, down from a prior reading of 2.4 percent, the Commerce Department said today.

The loonie has declined 2.5 percent against the greenback since Fed Chairman Ben S. Bernanke said on June 19 the U.S. central bank may begin paring back bond purchases this year.

Bernanke Overreaction

“We’ve had Fed officials and other officials from around the world indicating the market overreacted to Bernanke’s comments, and it’s not like the Fed is going to turn off the taps tomorrow,” David Watt, chief economist at the Canadian unit of HSBC Holding Plc., said by phone from Toronto. “Much of this move in the Canadian dollar, the weakening move earlier this weak, was not consistent with moves in key interest-rate spreads.”

The yield on December 2013 bankers’ acceptances, a measure of interest-rate expectations, fell to 1.36 percent from 1.38 percent yesterday. The yield has averaged 1.28 percent over the past three months. So-called Bax contracts have settled an average of about 0.20 percentage point above the central bank’s target rate since 1992, data compiled by Bloomberg show.

The Bank of Canada, whose key interest rate of 1 percent is the highest among the Group of Seven nations, is the only central bank among them with a leaning toward higher rates. Governor Stephen Poloz reiterated that stance, initiated by predecessor Mark Carney, in his first public comments on June 6.

‘Remain Accommodative’

“All of these central bankers have been trying to say, ‘Look here, the Fed isn’t talking about tightening policy, it’s just talking about reducing the accommodation, and policy will remain accommodative,’” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “Canada dollar as a consequence is off its worst levels against the U.S. dollar, it’s off its worst levels yesterday. That said, the environment is clearly jittery.”

The cost to insure against declines in the Canadian dollar versus its U.S. peer fell from the highest in almost a year last week. The one-month so-called 25-delta risk reversal rate fell to 1.7625, after reaching 1.8550 June 21, the highest since July 2012. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart dropped to 8.78 percent, from 8.87 percent June 24, the highest point in a year. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

The Canadian dollar has gained 0.3 percent this week against a basket of nine developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar gained 2.1 percent, the New Zealand dollar increased 1.6 percent and the greenback added 1.1 percent. Norway’s krone and Sweden’s krona lead decliners, down 0.8 percent and 1.8 percent.

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