Canadian Dollar Rises as Higher-Yielding Assets Draw Investors
By Theresa Ebden
Toronto, May 5 (Bloomberg) -- The Canadian dollar rose for a fifth straight day as the country's higher interest rates and faster pace of economic growth fostered demand for the currency.
Investors have pushed the Canadian dollar 11 percent higher this year, sending it above 70 U.S. cents last week for the first time in five years, as the central bank twice raised its benchmark lending rate in 2003. The country's two-year government bond yields 2.15 percentage points more than two-year U.S. Treasury notes.
Canada's dollar ``still has further to run,'' said Thomas Benfer, a director of foreign exchange at Bank of Montreal. ``You've got interest rates in favor in Canada; you've got the U.S. dollar out of favor.''
Canada's dollar rose to 70.88 U.S. cents at 5:15 p.m. in Toronto, from 70.49 cents on Friday. A U.S. dollar buys C$1.4108. Earlier it rose to 70.97 cents, the highest since March 1998. On Thursday, it rose above 70 U.S. cents for the first time since April 23, 1998. The currency will probably strengthen to C$1.40 in the next two months, Benfer said.
Canada's overnight lending rate is 3.25 percent, 2 percentage points above the Federal Reserve's benchmark. Fed policy makers meet tomorrow, and will likely leave rates unchanged, said 70 of 73 economists polled by Bloomberg News.
The Canadian central bank may raise rates again in September, said Gabriel de Kock, director of Canadian economic coverage at Citigroup Global Markets Inc. in New York. The Canadian dollar's performance this year makes it the sixth-best performing currency against the U.S. dollar out of 59 tracked by Bloomberg.
Today the U.S. dollar also dropped against the euro and yen as traders said the world's largest economy isn't expanding quickly enough to lure the international investment it requires to lower its trade deficit.
Expanding Economy
Government statistics Friday will show that Canada's economy added 10,000 jobs in April for a third straight month, according to the median of forecasts in a Bloomberg News survey. In contrast, U.S. companies cut jobs for a third month, the Labor Department said Friday.
Canada's economic growth last year of 3.4 percent was the highest of all Group of Seven industrialized nations. The pace will likely slow to around 2.3 percent this year, de Kock said.
An industry report today that showed the U.S. services industry unexpectedly expanded last month didn't shift demand to the U.S. dollar from Canada's currency. In the U.S., the Institute for Supply Management's index of services businesses rose to 50.7 last month, suggesting the U.S. economy may be gaining momentum.
Pattern Continues
The strength in the Canadian dollar is ``a continuation of last week's pattern,'' said Reid Farrill, executive director of foreign exchange sales at CIBC World Markets Inc. Investors are selling the U.S. dollar and raising holdings in Canada's currency, and drive Canada's dollar up to C$1.41, he said.
Canada's benchmark 5.25 percent coupon bond maturing in 2012 was little changed, rising 4 cents to C$102.23. Its yield fell 1 basis point to 4.94 percent. The bond's yield has lost 22 basis points in the past four weeks. The yield difference between benchmark 10-year Canadian and U.S. government securities widened 4 basis points to 1.06 percentage points.
``The Canadian bond market started looking attractive and we saw a decent amount of capital inflows, and that naturally helped the Canadian dollar,'' said Citigroup's de Kock.
The yield on the 3.5 percent coupon bond maturing in 2005 fell 2 basis points to 3.68 percent, and the 30-year 5.75 percent coupon bond maturing in 2029 was unchanged at 5.43 percent.
Non-Canadians bought C$4.6 billion more of the country's securities than they sold in February, led by purchases of bonds, Statistics Canada said last month, triple the average monthly amount in the last year.
Canadian bonds maturing in seven to 10 years are a good buy because the U.S. economy won't begin accelerating until at least the end of 2003, said Jeff Thompson, a fixed-income analyst at Mulvihill Capital Management.
``It will be disappointing that we're not going to see a huge recovery,'' Thompson. ``It's flat'' and so demand for bonds will stay strong, he said.
Canada's economy is closely linked to the U.S. because the two countries are the world's largest trading partners. The U.S. buys about 85 percent of Canadian exports. Exports represent about two-fifths of Canada's economy.
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