The Canadian dollar rose against a majority of its 16 most-traded peers after a report yesterday that the nation’s economy grew more than forecast in August eased concern caused when the Bank of Canada lowered growth forecasts last week.
The currency erased a gain against its U.S. peer after a measure of U.S. manufacturing activity rose to its highest since April 2011, suggesting the economy may be gaining enough steam for the Federal Reserve to taper the monetary stimulus program that tends to devalue the greenback. The Canadian dollar reached its lowest point in two months after the Bank of Canada reduced its growth forecasts Oct. 23 and removed language about the need for higher interest rates that was included in every policy statement for more than a year.
“The Europeans are coming back with a little bit of soft data and some readjustment of expectations of what we’re going to see from a monetary-policy perspective,” said Mark Frey, chief market strategist at Cambridge Mercantile Group, a global foreign exchange and payments provider, by phone from Victoria, British Columbia. “Compare that to a Bank of Canada that is still dovish, but all of a sudden the domestic economic situation in Canada is a little bit firmer than we anticipated.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0427 per U.S. dollar at 3:31 p.m. in Toronto. It reached C$1.0497 on Oct. 30, the weakest since September. One loonie buys 95.91 U.S. cents.
Canada’s 10-year benchmark government bond fell, with yields rising eight basis points, or 0.08 percentage point, to 2.51%. The 1.5% security maturing in June 2022 lost 68 cents to C$91.50.
The Bank of Canada announced yesterday it will auction C$3.4 billion ($3.3 billion) of five-year bonds on Nov. 6. The securities will mature in March of 2019.
Canada’s currency posted its best two-day performance against the euro in eight months on speculation the European Central Bank may cut interest rates at its meeting next week.
The Canadian dollar rose to C$1.4084 per euro, the strongest since Oct. 22.
The cost to insure against declines in the Canadian dollar versus its U.S. peer held at its lowest point in a week. The three-month so-called 25-delta risk-reversal rate touched 1.17% for the second day, the lowest since Oct. 25. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
The Institute for Supply Management’s index of U.S. factories rose to 56.4 in October, the highest since April 2011, from 56.2 a month earlier, the Tempe, Arizona-based group’s report showed today.
The median forecast in a Bloomberg survey of 83 economists was 55. Estimates ranged from 52.5 to 57.5. Readings above 50 indicate growth.
Manufacturing strengthened from China to South Korea last month in a sign that growth risks are abating in Asia and expansion may pick up this quarter.
“It just slightly increases the odds of a December taper,” said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, by phone from New York. “That’s still not the market’s core scenario, the market’s core scenario is still March. But hey, good ISM tells you that December is not off the table.”
Futures of crude oil, Canada’s largest export, fell 1.9% to $94.59, the lowest point since June. The discount Canadian producers face compared to U.S. crude benchmarks is $40, the most since January.
Canadian gross domestic product rose 0.3% to an annualized C$1.59 trillion, Statistics Canada said yesterday in Ottawa, beating the 0.1 median forecast in a Bloomberg economist survey.
Growth is on pace to quicken to about a 2.5% annualized pace this quarter according to economists at CIBC World Markets and TD Securities, the fastest since a 6.2% gain two years ago. That would be enough to reduce what the Bank of Canada last week called “significant” slack in the economy, which led policy makers to drop language about raising interest rates.
The Canadian dollar has gained 1.9% in the past week, making it the top performer among the 10-currencies Bloomberg Correlation Weighted Index, followed by the U.S. dollar.