Canada Dollar Trades Near 5-Week High as Stocks, Oil Fluctuate

By Chris Fournier

July 22 (Bloomberg) -- Canada’s dollar traded near the strongest in more than five weeks as U.S. stocks and crude oil, two of its main drivers, swung between gains and losses.

The loonie, as the currency is called for the aquatic bird on the dollar coin, is the best performer versus the U.S. dollar among the 16 most-active currencies so far this month. In June it was the laggard. It tends to rise and fall with stocks and commodity prices as a proxy for investors’ appetite for risk.

“Commodity currencies are starting to lose momentum,” said Ian Stannard, a currency strategist in London at BNP Paribas SA, France’s biggest bank. “Caution with long positions is the currently the way to play things.” A long position is a bet a currency will rise.

The Canadian currency appreciated 0.6 percent to C$1.0974 per U.S. dollar at 12:35 p.m. in Toronto, compared with C$1.1037 yesterday, when it touched C$1.0966, the strongest since June 11. One Canadian dollar buys 91.12 U.S. cents.

Crude oil for August delivery rose 1.1 percent to $65.44 a barrel in New York after falling as much as 1.5 percent. Raw materials including oil account for more than half of Canada’s export revenue.

The Standard & Poor’s 500 Index fluctuated as Starbucks Corp. and Apple Inc. posted better-than-estimated results and financial shares sagged as Wells Fargo & Co. said bad loans increased. The index last traded up 0.3 percent.

The correlation coefficient this year between the stock index and the loonie is 0.69, according to Bloomberg data. A reading of 1 would indicate they move in lockstep. The currency’s correlation with crude oil is 0.51, the data showed.

‘Stuck in a Range’

“So far the market seems to be stuck in a range,” said Steve Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “Clearly the market is expecting a little pause. It has been a fantastic run in equities”

The S&P 500 posted a 7 percent gain last week and climbed another 1.5 percent this week before today as improved earnings by banks including Goldman Sachs Group Inc. buoyed optimism that the global recession would soon end.

“In the weeks to come there’s going to be some disappointment with regard to the market’s positive scenario,” said BNP’s Stannard. “Markets have priced in the best case scenario for the second half.”

Statistics Canada said today that retail sales rose a higher-than-forecast 1.2 percent in May to C$34 billion ($30.8 billion). That compared with a revised decline of 0.6 percent in April. The median forecast of 21 economists surveyed by Bloomberg was for a May rise of 0.5 percent.

Central Bank Report

Crude, the nation’s largest export, increased for the past five days.

The Bank of Canada’s monetary policy report, due to be released tomorrow, may reiterate concern over the recent strength of the currency, Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital, wrote in a note to clients.

Central bank policy makers said in a statement yesterday the currency’s strength is “significantly moderating” an economic recovery that has been quicker than they expected. Bank Governor Mark Carney said last month the loonie’s appreciation could “fully offset” economic gains.

Canada’s government bonds fell, pushing yields on the 10- year note up three basis points, or 0.03 percentage point, to 3.44 percent. The price of the 3.75 percent security maturing in June 2019 decreased 22 cents to C$102.57. Government debt lost investors 2 percent so far in 2009, according to a Merrill Lynch & Co. index.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
Last Updated: July 22, 2009 12:37 EDT