Canadian Dollar Rises First Time in Four Weeks Before Fed Meets

The Canadian dollar posted its first five-day gain in four weeks as traders hedged bets for a drop versus its U.S. peer before Federal Reserve policy makers meet.

The currency rose against all its most traded peers after Bank of Canada Governor Stephen Poloz said the central bank had no view on the currency, bolstered expectations Poloz won’t act to devalue the dollar. The Federal Open Market Committee may decide at its Dec. 17-18 meeting to trim its $85 billion per month monetary stimulus which has tended to weaken the greenback. Speculators increased bets the Canadian dollar will fall versus its U.S. peer to the highest in seven months.

“At the start of this week they realized, oh shoot, the next big event, that’s actually the FOMC, and now I realize me along with everybody else are short Canadian dollar,” said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, by phone from New York. “That I think started the position squaring as a general trend.”

A short position is a bet an asset will fall in value.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.5 percent this week to C$1.0585 per U.S. dollar, making it the best performer among 16 major currencies versus the greenback. One loonie buys

94.47 U.S. cents.

Crude Oil

Futures traders’ bets the loonie will fall against the greenback rose to the highest since May, 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 -- so-called net shorts -- was 57,514 on Dec. 10, the highest since the week ended May 3.

Anderson said the biggest liquidations of Canadian dollar short positions occurred after the CFTC data, on Dec. 11 and 12, and speculators make up only a small part of the market.

Futures on crude oil, Canada’s biggest export, declined 1.2 percent decline this week to $96.50 a barrel in New York even as the discount Canadian producers face compared with the U.S. benchmark narrowed to the least since September. The discount for Western Canada Select compared with West Texas Intermediate touched $27 per barrel on Dec. 11, but has since widened to $28.50.

The loonie fell Dec. 12 along with the currency of Canada’s commodity-exporting peer Australia after central-bank Governor Glenn Stevens signaled a weaker local currency is preferable to lower interest rates to spur the economy, saying the Aussie’s natural level is probably closer to 85 U.S. cents than its current value of 89.64 cents.

‘Right Value’

“We don’t form a view on the dollar,” Poloz said later the same day at a press conference. The currency “is always the right value, because the market always gets it right.”

He added that many currencies rose against the U.S. dollar in response to the Fed’s monetary stimulus, and he expects that strength to reverse as the stimulus is wound down.

The cost to insure against declines in the loonie versus its U.S. counterpart touched the lowest in eight months this week before rising. The three-month 25-delta risk-reversal rate touched 0.95 percent, the lowest since April 5, before closing the week at 1.07 percent. The average this year is 1.26 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

“Profit taking is the only real reason you’d see CAD strength this week,” said Greg T. Moore, a currency strategist at Toronto-Dominion Bank, by phone from Toronto. “People who had been long dollar/CAD taking profits on gains over the past two and a half months.”

Top Performer

Canada’s 10-year government bond rose this week, with yields falling three basis points, or 0.03 percentage point, to

2.66 percent. The 1.5 percent security maturing in June 2023 is up 24 cents to C$90.36.

The loonie was the top performing currency this week among the 10 developed nation currencies in the Bloomberg Correlation-Weighted Index. The currency has added 0.8 percent against its nine peers, more than the Swiss franc and the euro, with 0.6 percent and 0.5 percent gains respectively. For the full year, the loonie is down 3.5 percent.

“Sentiment had gotten pretty pessimistic and it kind of has to take a breather before it takes its next move down,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto. “Overall message is you might get a bit of a reprieve in terms of the loonie’s descent, but the broader message should be we continue to anticipate the loonie’s decline over the course of 2014.”

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