Canada Dollar Gains as Summers Fed Withdrawal Boosts Risk Assets

The Canadian dollar increased to its strongest level in a month amid speculation the U.S. Federal Reserve won’t put an early end to its expansionary monetary policy, boosting riskier assets.

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, rose the most in more than a week versus the greenback as the exit of former U.S. Treasury Secretary Lawrence Summers from the race to lead the Fed damped bets monetary easing will conclude sooner than expected. The Fed begins a two-day meeting tomorrow during which policy makers may decide to slow asset buying. Government-bond yields declined the most in a week.

“The foreign-exchange market today has been shaped by the announcement that Larry Summers withdrew his candidacy,” David Doyle, a Toronto-based strategist at Macquarie Capital Markets, said in a telephone interview. “That’s been broadly interpreted as signaling that U.S. monetary policy over the coming five years is likely to be less hawkish and more accommodative, which is causing Canadian dollar strength.”

Canada’s currency appreciated 0.3 percent to C$1.0324 per U.S. dollar at 5 p.m. in New York after earlier touching C$1.0283, the strongest level since Aug. 12. One Canadian dollar purchases 96.88 U.S. cents.

Oil, Canada’s biggest export, slid 1.9 percent to $106.16 a barrel in New York.

Bond Reversal

Benchmark 10-year government bonds fell after rising earlier, pushing the yield on the security up two basis points, or 0.02 percentage point, to 2.78 percent. It dropped as low as

2.69 percent. The price of the 1.5 percent debt due in June 2023 dropped 12 cents to C$89.23.

Foreign investors bought Canadian securities in July, returning to bonds after a record divestment the previous month, government figures showed. Purchases totaled C$6.09 billion ($5.91 billion) in July following June’s net sale of C$15.4 billion, Statistics Canada said in Ottawa.

“Canadian dollar-positive flows from both reserve managers and investors helped to support CAD in 2011 and 2012,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, wrote today in a client note. “However, these have subsided in 2013 taking away an important driver of CAD strength.”

The loonie gained before a report tomorrow that may show Canadian factory sales increased 0.5 percent in July, after unexpectedly falling in June for the third time in four months, according to the median estimate of a Bloomberg survey.

‘Oversold’ Greenback

The U.S. dollar is “oversold and poised to reverse” versus the loonie, Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, wrote today in a client note. The Canadian dollar will bounce off C$1.0275 per dollar and weaken to at least the zone from C$1.0335 to C$1.04, he said.

Implied volatility for one-year options on the Canadian dollar versus its U.S. counterpart was at 7.18 percent today, the lowest since July 25. Implied volatility is used to set option prices and gauge the expected pace of currency swings. The average for this year is 7.41 percent.

Futures traders decreased their bets the Canadian dollar will fall against its U.S. peer for the first time in four weeks, figures from the Washington-based Commodity Futures Trading Commission showed on Sept. 13. The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie versus those on a gain -- so-called net shorts -- was 30,942 on Sept. 10, compared with 34,639 a week earlier.

Risk Reversals

The three-month so-called 25-delta risk-reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, rose to 1.34 percent, the highest in almost two weeks. The measure rose to 1.64 percent on Aug. 23, the highest level on a closing basis since July 2. The 2013 average is 1.26 percent.

Trading in over-the-counter options for the U.S. dollar-Canadian dollar pair amounted to $775 million, making up 5.3 percent of the $15 billion daily total. Greenback-loonie trading was 70 percent more than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis.

The loonie fell 2.6 percent in the past year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, making it the third-worst performer. The yen lost 20 percent, and the Australian dollar slipped 8.9 percent. The U.S. dollar rose 3.8 percent.

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