Canada Dollar Reaches One-Year High on Central Bank Divergence

Canada’s dollar touched a one-year high versus its U.S. counterpart and outperformed all of its peers as investors anticipated the Federal Reserve will announce more stimulus this week to sustain growth in the nation’s largest trading partner.

The Canadian currency rose against 14 of its 16 most-traded counterparts tracked by Bloomberg after Bank of Canada Governor Mark Carney said last week an increase in interest rates “may become appropriate.” The Federal Open Markets Committee meets Sept. 12-13. The greenback has weakened 22 percent against the Canadian dollar since the U.S. central bank introduced its first round of so-called quantitative easing in December 2008.

“The market is quite optimistic about the Fed unveiling some sort of quantitative easing and therefore we are seeing a fairly good overall tone,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal (BMO), said in a phone interview. “It seems to be what all investors are talking about this week and positioning for.”
The loonie, as the currency is nicknamed for the image of the waterfowl on the C$1 coin, rose 0.1 percent to 97.76 cents per dollar. It earlier rose to 97.55 cents, the strongest since Sept. 2, 2011. One Canadian dollar buys $1.02291.

The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of its so-called quantitative-easing strategy. In an Aug. 31 speech, Fed Chairman Ben S. Bernanke defended his unprecedented policies and laid out arguments for further action to combat unemployment, which he called a “grave concern.” The Fed will start a two-day meeting on Sept. 12.

Dutch Disease

Government bonds rose, snapping three days of losses. The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 1.83 percent. Two-year note yields declined 0.01 percentage point to 1.16 percent.
The Canadian corporate bond market suggests manufacturers are being penalized for central bank policies that have allowed a commodity boom to drive up the country’s dollar in what’s being termed as “Dutch Disease” by critics.
Bonds of machinery companies in the Bank of America’s Canadian Industrial Index have returned 1.7 percent this year through Sept. 7, compared with gains of 6.5 percent for miners and 3.2 percent for energy explorers. Average yields in the industrial index have narrowed 21 basis points, or 0.21 percentage point.
Bank of Canada Governor Mark Carney rejected the notion in a speech Sept. 7, saying price gains in oil and other commodities are being driven by demand from emerging markets rather than central bank policies.

Crude Oil

“People think that if it gets the chance, the Bank of Canada would tighten interest rates, and now we have the potential for QE3 from the Fed,” said George Davis, chief technical analyst for fixed income and currency strategy in Toronto at Royal Bank of Canada. “Last week, we took out the 98.01 level which was a low dating back to April for dollar- Canada, so that increased bearish sentiment.”

Oil traded near a one-week high in New York on speculation that the U.S. and China will add measures to revive their economies. Crude oil is Canada’s largest export.
Crude for October delivery was at $96.25 a barrel in electronic trading on the New York Mercantile Exchange, down 17 cents. The contract climbed 0.9 percent to $96.42 on Sept. 7, the highest close since Aug. 31.

Hedge funds raised bullish commodity bets to the highest in 16 months as investor speculation grew that policy makers in the U.S., China, and Europe will stimulate global growth.
Money managers increased their net-long positions across 18 U.S. futures and options by 2.3 percent to 1.33 million contracts in the week ended Sept. 4, the highest since May 3, 2011, U.S. Commodity Futures Trading Commission data show.

Technical Analysis

“It may be hard for the market to push significantly higher at the moment,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD), said in a research note about the dollar-loonie cross.
Key resistance is 98.40 cents to 98.45, Osborune wrote. The price could rise to 97 cents in the next 24 hours “as a result of the downward sloping trend in the short-term consolidation channel,” he said in the note.


To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net