Canadian Currency Climbs for Third Straight Week as World Oil Prices Rally

By Charles Mead - Mar 5, 2011 1:02 PM GMT+0800

Canada’s dollar rose for a third week against the greenback as crude oil, the nation’s biggest export, surged on concern unrest in Libya will spread to other North African and Mideast nations and curb shipments.

The loonie slid from a three-year high on March 1 as Bank of Canada Governor Mark Carneyreiterated that a strong currency poses challenges to exports while keeping borrowing rates unchanged. The Canadian dollar dropped against most of its major counterparts including the euro before a report next week forecast to show employers added fewer jobs in February than the previous month.

“The Canadian dollar is still very resilient,” said George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada in Toronto. “We continue to see very firm commodity prices and crude oil prices. A lot of people are worried we may see some more unrest in the Middle East over the weekend, so I think that backdrop is helping the Canadian dollar.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, appreciated 0.4 percent to 97.34 cents per U.S. dollar yesterday, from 97.74 on Feb. 25. It touched 96.84 cents on March 1, the strongest level since November 2007. One Canadian dollar purchases $1.0273.

Crude oil for April delivery increased for a third week, advancing 7.4 percent to $105.08 a barrel on the New York Mercantile Exchange after touching a 29-month high. Crude has gained 28 percent from a year ago.

Canada’s dollar reached its highest level since November 2007 hours before the Bank of Canada decided to hold borrowing costs steady. A day earlier, the government said the economy expanded more than expected in the fourth quarter at a 3.3 percent annual rate.

BOC Rate Decision

The Bank of Canada, which led the Group of Seven nations with three interest-rate increases last year, has kept its target rate for overnight lending between commercial banks at 1 percent since September.

Exporters still face “considerable challenges” from a currency trading near three-year highs and “poor relative productivity,” Carney and five deputies said in a statement.

The rate on the June 2011 bankers’ acceptance contract dropped to 1.46 percent, from 1.50 percent the day before the Bank of Canada’s decision. So-called Bax contracts have settled an average of about 0.20 percentage point above the central bank’s target rate since 1992, Bloomberg data show.

“It’s a self-defeating argument trying to buy the Canadian dollar on the expectations that they’re going to raise interest rates,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. A stronger loonie “is softening the inflation trajectory all the time, which inherently means they’re not going to have to tighten rates,” he said.

Loonie Versus Euro

The loonie slid 1.2 percent to C$1.3615 against the euro in its biggest weekly drop since Jan. 21 as European Central Bank President Jean-Claude Trichet signaled on March 3 that policy makers may increase the shared currency region’s main refinancing rate next month from a record low 1 percent to contain inflation.

Canadian 10-year bonds fell for the first time in three weeks, pushing the yield on the benchmark up four basis points, or 0.04 percentage point, to 3.33 percent. The price of the 3.50 percent note maturing in June 2020 slid 33 cents to C$101.14.

Employers added 25,000 jobs in February after an increase of 69,200 in the previous month, according to the median forecast of 23 economists before Statistics Canada’s March 11 report. The unemployment rate may have decreased to 7.7 percent, from 7.8 percent.

Ivey Index

The Ivey purchasing managers’ index was 69.3 in February after a January reading of 41.4, according to a statement on the University of Western Ontario business school’s website yesterday. Readings of less than 50 indicate purchasing by governments and companies declined.

In the U.S., Canada’s biggest trading partner, employers added 192,000 workers in February after a gain of 63,000 in the previous month, the Labor Department reported yesterday. The median forecast of 84 economists in a Bloomberg News survey was for an increase of 196,000. The unemployment rate unexpectedly dropped to 8.9 percent last month from 9 percent.

To contact the reporter for this story: Charles Mead in New York at cmead8@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net