Canada Dollar Rises to Three-Month High as Fed Retains Stimulus

Canada’s dollar advanced for a third week, touching a three-month high, as the Federal Reserve surprised markets by keeping intact record monetary stimulus that has helped support higher-yielding assets.

The currency trimmed gains after Fed Bank of St. Louis President James Bullard said yesterday the Sept. 18 decision was a close call and a “small” tapering of the $85 billion in monthly bond buying could come in October. The currency twice breached its 200-day moving average, a key test for some traders on whether the run of strength has momentum, before falling back. A report next week is forecast to show Canadian retail sales rose in July after declining the most this year in the prior month.

“The Fed was the catalyst across the foreign-exchange space,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “The important 200-day moving average was rejected because pent-up corporate demand to buy the U.S. dollar” was unleashed by the Fed’s inaction.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.5 percent this week in Toronto to C$1.0304 per U.S. dollar. It touched C$1.0182 on Sept. 18, the highest point since June 19. One loonie buys 97.05 U.S. cents.

‘Tipping Point’

Canada’s dollar extended a decline yesterday after BlackBerry Ltd., the smartphone maker that’s evaluating a sale, said it will cut 4,500 jobs and record an inventory writedown of as much as $960 million.

The job cuts are “actually enough to impact the overall Canadian labor market,” Terrence Connelly, founder of Lafayette, California-based hedge-fund advisory firm Contingent Macro Advisors LLC, said yesterday in an e-mailed reply to questions. “The knock-on effects could be significant over the coming months.”

This came two days after Bank of Canada Governor Stephen Poloz said Sept. 18 that confidence about global demand is bringing a “tipping point” where business investment takes over from “tired” consumers in leading output growth.

Businesses aren’t ready to take up the reins of growth, said David Madani, an economist at Capital Economics Ltd. He said he expects growth of 1 percent in the second half of the year, below the 3.2 percent annualized growth forecast by the Bank of Canada.

‘Further Depreciation’

“With no export recovery in sight, business investment growth will be modest,” Madani said by phone from Toronto. “Our year-ahead view is further depreciation in the Canadian dollar because of weakness in the Canadian economy.”

Madani forecasts the loonie to weaken to C$1.064 by year-end. It will fall to C$1.05 by Dec. 31, according to the median estimate of 48 economists in a Bloomberg Survey.

Futures traders decreased their bets that the Canadian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- net shorts -- was 18,764 on Sept. 17, compared with net shorts of 30,942 a week earlier. Traders have been betting on a decline since February.

The Fed’s decision to prolong asset purchases was “borderline,” Bullard said, amid data that showed a less-robust recovery. Chairman Ben S. Bernanke said the Fed would make the taper call based on “what’s needed for the economy.” The Federal Open Market Committee next meets Oct. 30.

December Expectations

Policy makers will wait until their December meeting to decide to reduce monthly purchases, 24 of 41 economists according to a Bloomberg survey conducted Sept. 18-19. The median estimate in an Aug. 9-13 poll projected the Fed would begin paring at this week’s meeting.

“The market’s a bit surprised by Ben Bernanke backing off the tapering,” Madani said. “We still think they’ll go ahead and do it, but not until December.”

The prospect of sustained bond-buying by the Fed triggered a rally in U.S. government debt and widened the interest-rate gap between Canadian and U.S. two-year government debt to as much as 92 basis points, or 0.92 percentage point, the most since January. U.S. two-year notes yielded 0.33 percent yesterday compared with Canadian two-year yields of 1.22 percent.

The two-year notes dropped six basis points on the week. Canada’s 10-year note yields fell seven basis points to 2.69 percent.

Moving Average

The loonie’s failure to stay above the 200-day moving average was due to Canadian companies that do business across the border taking the opportunity to buy U.S. dollars at the most attractive levels in three months, Spitz said. “That and corporate buying of the U.S. dollar will serve to mitigate Canadian dollar gains going forward,” he said.

The currency fell yesterday as Canada’s inflation rate slowed in August, with the consumer price index rising 1.1 percent from a year earlier, following July’s 1.3 percent pace, according to a report from Ottawa-based Statistics Canada. The core rate, which excludes eight volatile products, slowed to 1.3 percent from 1.4 percent.

Canadian retail sales in July are forecast to rise 0.6 percent after a 0.6 percent decline the previous month, according to the median estimate of 17 economists surveyed by Bloomberg. Statistics Canada will report the figures Sept. 24.

‘Vulnerable’ Loonie

“The Canadian dollar and all the other beneficiaries of quantitative easing remain vulnerable in the long term as tapering will occur -- the only question is when,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said yesterday in a note to clients. “Markets are still jittery, but I believe we have seen a near-term base for the U.S. dollar against most Group of Seven currencies.”

The loonie has fallen 1.7 percent this year against nine developed nations currencies tracked by the Bloomberg Correlation Weighted Index, ahead only of only the currencies of Japan and fellow commodities exporters Norway and Australia. The U.S. dollar advanced 2.5 percent and the euro added 5.4 percent to lead gainers.

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