Canada Dollar Gains as Carney Says Rate Increase Possible

Canada's dollar reached a one-week high against its U.S. counterpart after Bank of Canada policy makers signaled interest-rate increases remain possible even as the nation’s economy cools amid the global slowdown.
Canada’s domestic recovery will be hindered by weaker global demand for exports, policy makers led by Governor Mark Carney said in a statement. The central bank left the target overnight rate unchanged at 1 percent, matching the prediction of all 24 forecasters in a Bloomberg survey. The loonie, as the currency is nicknamed, briefly erased gains after Federal Reserve Chairman Ben S. Bernanke said progress in reducing unemployment is likely to be “frustratingly slow.”
“The bias is still clearly towards tightening, but it’s a very weak tightening bias,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, said in a telephone interview. “Dollar-Canada is still stuck around C$1.0140.”
Canada’s currency strengthened 0.3 percent to C$1.0120 per U.S. dollar at 5 p.m. in Toronto. It touched $1.0119, the strongest level since July 5. One Canadian dollar buys 98.81 U.S. cents.
Government bonds fell, pushing yields on benchmark 10-year bonds up two basis points, or 0.02 percentage point, to 1.64 percent. The yield fell yesterday to a record low 1.598 percent. The price of the 2.75 percent securities maturing in June 2022 fell 23 cents to C$110.08.

Bond Auction

The Bank of Canada is scheduled to release details July 19 on a 10-year note auction on July 25.
Canada’s currency may continue to strengthen against the euro as moving averages trade close to opening levels, according to Toronto-Dominion Bank’s TD Securities unit. Yesterday, the euro rallied from a new-cycle low to form a “key reversal/hammer,” Greg Moore and Osborne, strategists at the firm, wrote in a note to clients today.
If the loonie continues to trade close to opening levels against the shared currency it will signal a return to the euro’s trend lower, the strategists wrote.
The loonie reached a record high of C$1.2365 yesterday, the strongest level since the euro began trading in 1999.
“We have noted before that trend momentum is overwhelmingly bearish here across a range of time frames,” Moore and Osborne wrote. “It will take a much stronger turnaround in this market to convince us that the bear trend is petering out.”
In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Resistance is a level on a chart where sell orders may be clustered.

Full Output

The world’s 10th largest economy won’t reach full output until the second half of next year, compared with an April prediction for the first half of 2013, the Ottawa-based central bank said.
“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth,” policy makers said in a statement. “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
“It was a balanced statement, maybe a little more hawkish than the market expected,” Blake Jespersen, managing director of institutional foreign exchange sales in Toronto at Bank of Montreal, said in a telephone interview.
Carney’s status as the lone Group of Seven finance leader warning of higher interest rates is pushing the nation’s bond yield curve to the flattest level in four years.

Yield Gap

The difference between two-year and 10-year Canadian government bond yields reached 64.8 basis points on July 13, the narrowest yield curve among the industrialized countries. The gap narrowed to 64.7 basis points on May 15, the least since July 2008. It was 66.6 basis points today.
Carney has said since April that tightening may become warranted, putting him at odds with counterparts in Europe, the U.S., China and Japan who have been adding stimulus. Carney reiterated his stance in the statement accompanying today’s decision in Ottawa.
Investors reduced bets on interest-rate cuts. Trading in overnight index swaps showed about 25 percent odds the Bank of Canada will cut rates by year-end, from about 30 percent yesterday, according to Bloomberg calculations.
“There had been some speculation they would modify the statement to some degree, but they’re loathe to backtrack to any degree that would entrench people to think they’re considering rate cuts,” said TD Securities’ Osborne by phone. “They want to keep that off the radar.”

Bernanke Testimony

Fed Chairman Bernanke said the U.S. central bank is ready to take further action to boost the recovery, while refraining from discussing specific steps.
“The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said today in testimony for delivery to the Senate Banking Committee in Washington. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery,” he said.
Canadian factory sales fell for the fourth time in five months in May as temporary shutdowns of oil refineries reduced petroleum output.
Sales dropped 0.4 percent to C$48.7 billion ($48.0 billion) following a revised 1.1 percent decline in April, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast a 0.6 percent gain, based on the median of 18 responses.
The Canadian dollar has gained 2.2 percent this year against its nine counterparts, according to Bloomberg Correlation-Weighted Indexes. The U.S. dollar has risen 1.3 percent.

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