Canadian Dollar Gains After Data Boost Case for Tighter Policy

The Canadian dollar gained against the majority of its peers after signs of a recovery in the U.S. added to speculation the Bank of Canada will consider tightening monetary policy before the end of next year.

U.S. reports showing companies boosted payrolls in July by the most this year and an economy that grew more than projected in the second quarter may prompt the Canadian central bank to move up the timetable for higher rates, compared with a forecast in the fourth quarter of 2014. The currency extended gains Federal Reserve said today it will maintain its $85 billion in monthly bond purchases amid persistently low inflation that could hamper economic expansion.

“The Canadian recovery is still on track and does depend on how the U.S. economy unfolds,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD securities unit in Toronto. “If the U.S. is looking objectively stronger, that does help to get the Bank of Canada thinking about rate hikes, but that’s a long way off.”

The loonie, as the currency is nicknamed for the image of the waterfowl on the C$1 coin, added 0.3 percent to C$1.0277 at 5 p.m. in Toronto after earlier climbing to C$1.0212, the strongest since June 19. One loonie buys 97.31 U.S. cents.

Bonds Decline

Canada’s benchmark 10-year government bonds rose, pushing yields down six basis points, or 0.06 percentage point, to 2.45 percent, after reaching 2.59 percent earlier in the day. The 1.5 percent security maturing June 2023 climbed 51 cents to C$91.75.

Canada’s key rate has been unchanged at 1 percent since September 2010, where it is forecast to remain until the fourth quarter of next year. The central bank raised its economic growth forecast for this year to 1.8 percent from an April prediction of 1.5 percent in its July 17 monetary policy report.

The Federal Reserve said persistently low inflation could hamper the U.S. economic expansion. “The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said at the conclusion of its two-day meeting in Washington.

Half of the 54 economists surveyed by Bloomberg News from July 18-22 expect the Fed to start reducing monthly bond purchases that had depressed borrowing costs worldwide in September.

The Canadian dollar dropped earlier after a report showed the economy expanded by a slower-than-predicted 0.2 percent in May. Economists had predicted 0.3 percent growth, according to a Bloomberg survey with 20 responses. The Bank of Canada expects annualized growth of 1.8 percent in the second quarter.

Potash Exports

Saskatchewan’s economy may grow half as quickly as projected after OAO Uralkali, the world’s largest potash producer, broke up a cartel that controlled 43 percent of world exports, Royal Bank of Canada said in a note yesterday.

A “double digit” decline in potash production from the Canadian province could reduce Saskatchewan’s gross domestic product by 1 percentage point in 2013, Paul Ferley, assistant chief economist at Royal Bank, said in a report. Stalled construction in the industry may shave another 0.5 percentage points from growth, which Royal Bank had estimated at 2.9 percent this year, he said.

Potash represents almost 20 percent of Saskatchewan exports, Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a note today that also forecast growth could shrink as much as 1 percentage point.

The Canadian dollar closed at A$1.0832, the highest point versus its Australian counterpart in three years on concern China may tolerate a slower pace of expansion than officials previously indicated. China releases its monthly manufacturing PMI results at 9 p.m. New York time.

“We’re trying to get a sense of how quickly China can manage some of its recent weakness,” Toronto-Dominion’s Tulk said. “More structurally policymakers are trying to avoid inflationary risks they’ve had in recent years.”

The loonie has risen 0.9 percent in the past month against nine other developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar lost 1.4 percent.

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