Canada Dollar Gains as Stimulus Bets Fuel Risk-Asset Demand

Canada’s dollar rose against its U.S. counterpart for a second week amid speculation global central banks will take additional steps to sustain wavering economic growth, increasing the demand for riskier assets.
The currency gained for a fifth week versus the euro, the longest streak since January, as the Bank of Canada announced it would hold its benchmark interest rate unchanged. Policy makers indicated interest-rate increases are possible, putting the central bank at odds with counterparts in the U.S., Europe, China and Japan who have been adding monetary stimulus. Retail sales rebounded in May, according to a Bloomberg News survey of economists before the July 24 report.
“There was a buy-the-rumor, sell-the-fact situation this week, particularly after the Federal Reserve gave just enough verbiage to keep hopes alive of some sort of accommodation,” Greg Moore, a currency strategist at Toronto-Dominion Bank, said in a telephone interview.
Canada’s currency, nicknamed the loonie, rose 0.2 percent this week to C$1.0125 per U.S. dollar in Toronto. It touched C$1.2290 against the euro, the strongest since the 17-nation currency began trading in 1999. One Canadian dollar buys 98.77 U.S. cents.

Market Measure

The loonie fell 0.1 percent this week against nine major counterparts, according to the Bloomberg Correlation-Weighted Indexes. It has gained 2.4 percent this year, while the U.S. dollar added 1.4 percent.
Futures traders reversed their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed yesterday.
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 1,208 on July 17, compared with net longs of 4,338 the previous week. Futures are agreements to buy or sell assets at a set price and date.
Most government bonds gained, pushing yields on benchmark 10-year debt down two basis points, or 0.02 percentage point, to 1.61 percent. The 2.75 percent securities maturing in June 2022 rose 20 cents to C$110.35.

Bond Sale

The Bank of Canada plans to sell C$2.6 billion ($2.6 billion) of 10-year debt on July 25. The securities will mature June 1, 2023.
Futures on crude oil, Canada’s biggest export, rose for a second week, adding 5 percent to $91.44 a barrel. The Thomson Reuters/Jefferies CRB Commodity index advanced for the fourth week, gaining 3.6 percent.
Canada’s economic recovery will be hindered by weaker global demand for exports, policy makers led by Governor Mark Carney said in a statement July 17. The central bank left the target overnight rate at 1 percent, where it’s been since September 2010.
“The markets are playing the debasement trade,” Stephen Gallo, senior foreign-exchange strategist at Credit Agricole SA in London, said in a telephone interview. “They’re buying the currencies that have positive real interest rates and selling the heck out of the ones with negative real interest rates. It’s ongoing slippage away from the euro.”

Economic 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. The Bank of Canada said in its monetary policy report July 18 that consumers and business investment will lead modest economic growth through 2014, while weaker global demand curbs exports. Canada derives about half its export revenue from raw materials.
“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.”
Fed Chairman Ben S. Bernanke told Congress this week the U.S. central bank is ready to take more steps to boost the economy, if necessary. The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing, seeking to cap borrowing costs.

Price Trends

Canada’s consumer price index climbed 1.5 percent in June from a year ago, Statistics Canada said today in Ottawa, compared with a forecast for a 1.7 percent increase in a Bloomberg News survey of economists. The core inflation rate, which excludes eight volatile products, increased 2 percent after a May gain of 1.8 percent. Economists surveyed by Bloomberg forecast the June core rate would increase 2.3 percent.
On a monthly basis, both the total and core price indexes fell 0.4 percent in June. Economists surveyed by Bloomberg predicted consumer prices would fall of 0.2 percent in the month and the core index would decline 0.1 percent.
“Risk sentiment was already weak and this CPI data has put a damper on the Canadian-dollar bulls,” Steve Butler, managing director in Toronto at Scotiabank, said by e-mail. “The market was leaning on CPI coming in slightly higher than expectations.”
Retail sales are forecast to have increased 0.5 percent in May after a 0.5 percent drop in April, according to the median estimate of 17 economists surveyed by Bloomberg News before the Statistics Canada report in Ottawa.
The loonie will end the year at C$1.02 per U.S. dollar, according to median estimate of 44 forecasters surveyed by Bloomberg News.

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