Canadian dollar gains with oil as crude spread at five-month low

The Canadian dollar rose for a fifth day against its U.S. counterpart as oil, the country’s largest export, touched its highest point in a month, prompting investors to reverse near-record bets the currency will fall.

Canada’s dollar rose against the majority of its 16 most- traded peers as the discount Canadian oil producers face to the U.S. benchmark narrowed to the least in almost five months. The currency has gained since a report showed last week that bets by futures traders that the Canadian currency would fall versus the U.S. dollar outnumbered bets it would rise by the most in seven years. Inflation increased in February to 0.7% from 0.1 the prior month, according to a Bloomberg survey before tommorow’s report.

“It’s short covering, Canadian dollar short covering,” Greg Anderson, head of Group of 10 currency strategy at Citigroup Inc., said by phone from New York. “Everybody who’s short the Canadian dollar knows that everybody else is short the Canadian dollar, and it’s an uncomfortable spot to be in. So they try to slip out the back door, and I think that’s part of what’s behind Canadian dollar strength today.” A short position is a bet an asset will decline in value.

The loonie, as the Canadian dollar is known for the image of aquatic bird on the C$1 coin, rose 0.4% to C$1.0175 per U.S. dollar at 3:31 p.m. in Toronto. One Canadian dollar buys 98.28 U.S. cents. The loonie rose seven straight days in the period ending Dec. 12.

Bonds, Oil

Canada’s benchmark 10-year government bonds were little changed with yields at 1.82%. The 2.75% security maturing in June 2022 cost C$107.88. The Bank of Canada will auction 10-year notes tomorrow.

Futures of crude oil rose 0.9% to $95.66 per barrel in New York after reaching $95.88, the highest point since Feb. 20. The discount between the Canadian and American benchmark crude oil blends touched C$16.25 for a second day, the narrowest since Oct. 17, after reaching a record of C$42.50 on Dec. 14.

The Standard & Poor’s GSCI Index of 24 commodity prices gained 0.3% and the S&P 500 Index of U.S. stocks climbed 0.5%.

A Citigroup model that combines equity and commodity prices with interest-rate differentials to model the loonie versus the U.S. dollar shows the Canadian currency is 2% undervalued and should rise toward parity, according to a research note released today.

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