Canada Dollar Rises to 3-Week High on Bets of More U.S. Stimulus

The Canadian dollar rose to its highest level in three weeks after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy still isn’t strong enough to do without monetary stimulus.

The loonie, as the currency is nicknamed, strengthened for a fourth day after minutes of the Fed’s June meeting released yesterday showed many officials wanted to see more signs employment is improving before backing a reduction to bond purchases. Canada’s dollar also advanced versus the majority of its most-traded peers, including the currencies of its commodity-exporting counterparts, Australia and New Zealand. Home prices rose in May, a government report showed.

“Obviously, a big shake out in positioning over the last 24 hours or so with the dollar selling off in the wake of the Fed minutes and Bernanke’s comments yesterday,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “Tapering is still on track for the latter part of this year, possibly for September and we think the program winds up for the early part of 2014. It should mean a weaker Canadian dollar, higher U.S. dollar.”

The loonie added 1 percent to C$1.0366 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0326, the strongest level since June 20. One loonie buys 96.47 U.S. cents.

Options Data

The cost to insure against declines in the Canadian dollar versus its U.S. peer fell to the lowest point on a closing basis in nine weeks. The three-month so-called 25-delta risk reversal rate reached 1.3525 percent, the lowest since May 9. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Canada’s 10-year benchmark bond rose, with yields falling five basis points, or 0.05 percentage point, to 2.44 percent. The 1.5 percent security maturing in June 2023 added 38 cents to C$91.77.

Economists are forecasting the appreciation in the 10-year bond will continue as economic growth in Canada remains tepid.

Yields on benchmark 10-year bonds will fall to 2.40 percent by September, according to the median forecast in a Bloomberg survey of 23 economists. They climbed 74 basis points in May and June, the fastest two-month increase since 1994.

Central Banks

The Bank of Canada is likely to leave interest rates at 1 percent at its meeting July 17, according to options data. Traders are pricing in less than two basis points of tightening by next week’s meeting, according to Bloomberg calculations based on overnight index swaps. Governor Stephen Poloz will also deliver his first monetary policy report since taking up the role June 3.

“No one knows what to make of the Fed taper theme, which is the primary issue driving markets and we’re not going to get any impetus from the Bank of Canada next week,” said Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, by phone from Toronto. “We’ll settle into a range. However, I’m still dollar bullish if you look past July.”

Futures on crude oil, Canada’s largest export, fell 1.8 percent to C$104.65 per barrel in New York after reaching a 15-month high yesterday. The Standard & Poor’s 500 Index of U.S. stocks gained 1.4 percent.

Canada’s new home price index rose 0.1 percent, led by a 0.9 percent increase in Calgary, Statistics Canada said today in Ottawa. Economists predicted the index would rise 0.2 percent on the month, according to the median estimate in a Bloomberg survey with nine responses. From a year earlier, new home prices increased 1.8 percent.

Price Swings

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart was at 8.0500 percent, almost the 7.9500 touched yesterday that was the lowest since June 20. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

“Until Bernanke spoke yesterday, it’s been a general bullish U.S. dollar trend,” said David Bradley, director of foreign-exchange trading at Bank of Nova Scotia’s capital markets unit, by phone from Toronto. “North America is going to outperform Europe in the long-term. You’re going to see the U.S. dollar stronger and you’re going to see the Canadian dollar outperform its counterparts.”

The Canadian dollar has gained 0.2 percent in the past week among a basket of 10 developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Norwegian krone has led gainers with a 1.4 percent increase, followed by the yen’s 0.4 percent gain.

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