Canadian Dollar Reaches Two-Month High, Bonds Fall on Inflation
By Haris Anwar
May 21 (Bloomberg) -- Canada's dollar rose to the highest in more than two months and government bonds fell as traders speculated the Bank of Canada will be less likely to cut its main rate after a report showed inflation accelerated in April.
The Canadian dollar has increased 3.4 percent during the last nine trading days as crude oil reached multiple records. Interest-rate futures in Canada suggest traders reduced bets the central bank will cut borrowing costs further.
``Higher inflation may slow the pace of monetary easing in Canada,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, France's biggest bank. ``The Canadian dollar is picking up some support after the inflation number. The currency can head back to its February high of 97.12 cents'' per U.S. dollar.
Canada's dollar strengthened 0.8 percent to 98.41 cents per U.S. dollar at 3:21 p.m. in Toronto, from 99.23 cents yesterday. Earlier, it touched 98.20 cents, the highest since March 14. One Canadian dollar buys $1.0162.
The Canadian dollar strengthened against 12 of the 16 most- active currencies.
The central bank lowered the target lending rate by a half- percentage point to 3 percent on April 22 to shield the economy from a U.S. economic slowdown.
Canadian consumer prices rose 0.8 percent in April, after a 0.4 percent gain in the previous month, Statistics Canada reported today in Ottawa. The figure compared with the median forecast of a 0.4 percent increase in a Bloomberg News survey of 24 economists.
Core Inflation
The core inflation rate advanced 1.5 percent from a year earlier, compared with 1.3 percent in March that was the slowest since July 2005. Economists predicted that measure would also be unchanged. The monthly core inflation rate of 0.3 percent was also faster than the 0.2 percent economists forecast.
The core rate is used by policy makers as a guide to future trends. It excludes volatile items such as gasoline and fruit and discounts tax cuts such as a reduction in the federal sales tax earlier this year.
Bankers' acceptances futures contracts for September rose 16 basis points, or 0.16 percentage point, to 2.80 percent. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.
The loonie, as the currency is known because of the image of the bird on the one-dollar coin, has traded near parity with its U.S. counterpart this year after climbing 17 percent in 2007. It touched a 2008 low of C$1.0379 on Jan. 22, and a high of 97.12 cents per U.S. dollar on Feb. 28.
Slowest Economic Growth
Bank of Canada Governor Mark Carney reiterated on May 1 he'll probably need to lower interest rates again after four cuts since December, citing the slowest economic growth in 16 years and below-target inflation. Policy makers next meet on June 10.
The central bank targets the core rate of inflation below 2 percent. The bank's key rate will decline to 2.75 percent by the end of 2008, according to the median forecast in a Bloomberg survey.
``We could see the Canadian dollar continue to do relatively well,'' said Laurent Desbois, president of the Montreal-based currency fund Fjord Capital, which oversees more than $100 million. ``As long as commodity prices stay elevated,'' and the U.S. doesn't face a ``full-blown recession,'' the currency will remain supported.
Crude oil rose to a record above $133 a barrel as U.S. stockpiles unexpectedly dropped and banks raised price forecasts because of supply constraints and demand growth. The oil sands in Alberta contain the largest crude deposits outside the Middle East.
Currency Forecast
Strategists at Morgan Stanley, the world's second-largest securities firm, exited their recommendation to sell the currency against its U.S. counterpart.
``After months of muddling along an uninspired path, the Canadian dollar has started to move,'' London-based Ned Rumpeltin wrote in a note to clients. The strength in the Canadian dollar is ``more related to oil price effects than as a reflection of domestic fundamentals.''
Morgan Stanley recommended selling the Canadian dollar, forecasting the currency would fall to C$1.10, last month.
Bullish on the Loonie
Options traders are the most bullish on the Canadian dollar in four months.
The premium paid on call options that grant the right to buy the currency, over put options which give the right to sell, reached the largest since Jan. 15. The risk-reversal rate for one-month options touched minus 0.1525 percent, with a negative reading indicating a premium for calls relative to puts. As recently as May 19, there was a premium for puts.
Canada's dollar will decline to C$1.08 by the first quarter of 2009, according to the median forecast of 37 analysts in a Bloomberg survey.
The yield on the two-year Canadian government bond rose 15 basis points to 2.91 percent. The price of the 3.75 percent security due in June 2010 fell 28 cents to C$101.65. The yield increased the most since April 1.
The 10-year government bond's yield increased 7 basis points to 3.59 percent. The price of the 4 percent security due June 2017 fell 50 cents to C$103.18. The yield is down 40 basis points this year.
`Scary Inflation Number'
``We got a scary inflation number,'' said Michael Herring, managing director and fixed-income strategist at BMO Capital Markets, a unit of Canada's fourth-largest bank. ``I feel Mark Carney will still cut interest rates. He's less concerned about inflation. He's looking at the stronger Canadian dollar, which will continue to put downward pressure on inflation. People will start building an ease again.''
Canada's two-year bond yield will touch 2.87 percent by the end of this year, with the 10-year yield reaching 3.81 percent, according to the median forecast in a Bloomberg survey.
The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 23 basis points, up from 14 basis points on April 30. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22.
Canadian government bonds have returned 3.7 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries during the same period returned 2.7 percent.