Canada Dollar Matches Highest Level Since May as Crude Oil Gains

By Chris Fournier - Aug 29, 2012 5:26 AM GMT+0800

Canada’s dollar gained for the third day versus its U.S. counterpart amid an advance in crude oil, the nation’s largest export.

The currency matched the strongest level since May as crude inventories were forecast to drop, Hurricane Isaac approached the Louisiana coast and a fire continued to burn at Venezuela’s biggest refinery. The currency gained against its commodity- exporting peers on speculation Canada will benefit from U.S. economic growth as China’s economy falters, weakening the outlook for Australia’s and New Zealand’s economies.

“The risk backdrop is still positive,” George Davis, chief technical analyst at Royal Bank of Canada’s RBC Capital Markets unit in Toronto, said in an e-mail. “There are some cross flows behind the Canadian dollar strength, as well.”

Canada’s currency, nicknamed the loonie, climbed 0.3 percent to 98.82 cents per U.S. dollar at 5 p.m. in Toronto. It touched 98.43 cents, matching its high point on Aug. 21, the strongest since May 3. One Canadian dollar buys $1.0119.

Davis said the break in the U.S. dollar below “short-term support” at 98.84 cents attracted some selling interest in the currency versus the Canadian dollar. Support refers to the lower boundary of a trading range, where buy orders may be clustered.

Longer-term government bonds rose for a second day, pushing the yield on Canada’s benchmark 10-year security down one basis point, or 0.01 percentage point, to 1.80 percent. The yield reached a record low 1.565 percent on July 23. The price of the 2.75 percent debt due June 2022 increased 7 cents to C$108.50.

Bond Auction

The Bank of Canada will auction tomorrow C$2.9 billion ($2.93 billion) of 1.5 percent bonds maturing in August 2015. The previous auction of three-year bonds on June 13 drew an average yield of 1.153 percent and a coverage ratio -- the amount bid relative to the amount offered -- of 2.47 times, compared with an average over the past five three-year auctions of 2.46 times.

Canadian government bonds have returned 1.7 percent since the start of the year, according to Bank of America Merrill Lynch data.

Finance ministers from the Group of Seven nations are monitoring the risks posed by high oil prices, according to a Group of Seven joint statement issued today by the U.S. Treasury Department. The G-7 nations called on oil-producing countries to increase output and said they “stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied.”

Oil Rises

Futures on crude oil rose 0.9 percent to $96.33 a barrel in New York. Futures advanced as much as 1.1 percent after the Bureau of Safety and Environmental Enforcement reported yesterday that 78 percent of crude production from the Gulf has been shut in as Isaac approaches. Canada is the largest supplier of energy products to the U.S., the world’s biggest economy.

“Crude oil is still posting plus-$96,” Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA), said in a telephone interview. “Any supply disruptions from Isaac could put a bid to the Canadian dollar.”

The loonie also is being supported by money managers’ purchases of the currency to balance portfolios for month-end amid gains in equity indexes, Spitz said.
“There are reasons to want to be long the Canadian dollar from a reserve diversification perspective,” he said. “Month- end flows will be reasonable and will be biased for U.S. dollar selling given the positive performance by most equity indices.” Long positions are bets a currency will strengthen.

GDP Report

Economists predict Statistics Canada will report on Aug. 31 that gross domestic product expanded for a fourth straight quarter.
Canada’s dollar rose against a majority of its most-traded counterparts as risk appetite strengthened. Federal Reserve Chairman Ben S. Bernanke will give a speech on Aug. 31 at an annual economics conference in Jackson Hole, Wyoming, which investors are awaiting to gauge the outlook for monetary policy.

The greenback touched a seven-week low against the euro last week after minutes of the Federal Open Market Committee’s most recent meeting showed many policy makers favor a third round of large-scale debt purchases under quantitative easing to stimulate growth.

“The Canadian dollar has a strong correlation with equities, confirming our view that the most important risk for the currency is the FOMC decision on QE3,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia (BNS)’s Scotiabank unit in Toronto, wrote in a note to clients today. “That leaves the Canadian dollar particularly vulnerable to Jackson Hole.”

Canada’s dollar rose for a third day against the New Zealand currency, reaching the strongest since June. The South Pacific currency weakened on speculation the Chinese economy, the country’s second largest export market, may be faltering. Data this week may show Chinese manufacturing stagnated.

The loonie strengthened 0.8 percent to 79.52 Canadian cents versus the so-called kiwi. It rose for a fourth day versus the Australian currency, trading 0.2 percent higher to C$1.0255.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net