Canadian Dollar Rises For First Time in Seven Days as Oil Gains

By Jamie McGee

July 30 (Bloomberg) -- Canada's dollar rose for the first time in seven days as the price of crude oil climbed following a report that U.S. gasoline inventories declined.

The currency had slumped earlier after government reports showed that manufacturers' prices rose less than raw-material costs in June, a sign companies aren't passing all of a jump in energy expenses to consumers. Oil more than $4 a barrel, the biggest gain since July 10. Alberta holds the largest crude oil reserves outside the Middle East.

The dollar rose 0.09 percent to C$1.0228 per U.S. dollar at 4:06 p.m. in Toronto, from $1.0237 yesterday. One Canadian dollar buys 97.77 U.S. cents. The currency has dropped 2.4 percent so far this year versus its U.S. counterpart.

``The expectations of a free-fall in crude oil that had begun to build into market fears have been pushed aside for the time being,'' said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York, the world's largest custodian bank with about $23 trillion in assets. ``Because the loonie is a commodity-linked currency, it has taken some selling pressure off the Canadian dollar.''

Crude supplies fell 3.53 million barrels to 213.6 million barrels last week, the U.S. Energy Department said today. Stockpiles were forecast to rise 350,000 barrels, according to a Bloomberg News survey.

The raw materials price index rose 4.4 percent, Statistics Canada said today from Ottawa, led by an 8.4 percent gain in fuels such as crude oil. Economists anticipated a 3.5 percent increase, the median of 12 responses. The industrial product price index, which measures what factories charge for goods, rose 1.3 percent, faster than the 1 percent median forecast.

Commodities Override

``Commodity prices will override pretty well all other factors in influencing the Canadian dollar, energy prices in particular,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The currency has traded near parity with its U.S. counterpart since September. It touched a 2008 low of C$1.0379 on Jan.22, and a high of 97.12 cents per U.S. dollar on Feb. 28.

Natural gas for September delivery rose to $9.280 per million British thermal unit, after reaching $8.810 this morning, its lowest price since February. Commodities make up more than half of Canada's exports.

``Commodities will continue to ease off their highs, given the ongoing demand destruction,'' Guatieri said. ``Once the emerging nations cool off further, commodity prices will cool off some more.''

Crude Oil Pullback

The price of oil is forecast to end the year at $123.90 a barrel, according to a median forecast in a Bloomberg survey. Woolfolk anticipates $100 per barrel by year-end.

``Canada's economy has not benefited from the recent move in oil above $100 a barrel,'' Woolfolk said. ``Above $100 it's so expensive it begins to hurt the consumer. It impacts transportation costs, corporations begin cutting back to save money, there are layoffs.''

Canada's economy likely expanded by 0.2 percent in May, compared with a 0.4 percent increase in April, according to the median estimate of 24 economists in a Bloomberg survey. Statistics Canada is scheduled to release the data tomorrow at 8:30 a.m. in Ottawa.

``I see the market concerned about growth, a stagnating growth amidst rising inflation risk,'' said Jack Spitz, managing director of foreign-exchange trading at National Bank of Canada in Toronto. ``That dovetails what the Bank of Canada tells us.''

The Bank of Canada kept its overnight lending rate at 3 percent on July 15 after lowering its rate four times since December. The central bank's next meeting is Sept. 3.

Yield Spread

The Canadian dollar will weaken to C$1.07 in the first quarter of 2009, according to the median estimate of 29 economists surveyed by Bloomberg News.

The yield on the two-year government bond was unchanged at 3.06 percent. The price of the 3.75 percent security due in June 2010 was little changed at C$101.22. The 10-year bond's yield rose 3 basis points, or 0.03 percentage point, to 3.82 percent.

The U.S. 10-year Treasury note yielded 22 basis points more than the comparable-maturity Canadian bond, narrowing from 39 basis points on June 25.

Canadian government bonds have returned 3.2 percent this year. U.S. Treasuries have returned 2.3 percent in 2008, according to Merrill Lynch & Co. index statistics.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net.