Canada's Dollar Gains This Week on Inflation, Fiscal Surplus

Canada's Dollar Gains This Week on Inflation, Fiscal Surplus
By Haris Anwar
Nov. 25 (Bloomberg) -- Canada's dollar rose this week, ending a three-week losing streak, after a measure of inflation jumped, and the government said it'll post a surplus double the previous forecast.
The currency rebounded from a seven-month low as investors speculated a robust economy will keep the Bank of Canada from cutting the borrowing cost soon.
``There is no denying that there is a change in momentum for the Canadian dollar,'' said Linda Jespersen, managing director of currency trading at National Bank of Canada in Toronto. ``A lot of this has to do with the strong economy, a record high equity market, and relatively strong mining sector. The near-term trend is still going to be the Canadian dollar strengthening.''
The currency rose 1.1 percent this week, the most since the week ended Oct. 20, to 88.13 U.S. cents. One U.S. dollar buys C$1.1349. Canada's dollar dropped 1.2 percent during the week ended Nov. 17.
The core inflation rate, which tracks prices minus eight volatile goods and the impact of tax changes, rose 2.3 percent last month from a year earlier, the most since 2003, Statistics Canada said Nov. 22.
A day later, the Canadian government said it expected to double the federal surplus to C$7.2 billion ($6.35 billion) in the year ending in March. Finance Minister Jim Flaherty said the Canadian government is committed to buying back C$3 billion in bonds each year, part of a plan to eliminate net debt by 2021.
U.S. Slowdown
The currency also get a boost from a general weakness in the U.S. counterpart, which dropped to 19-month low against euro on speculation the Federal Reserve will reduce the borrowing cost as the world's largest economy slowed.
``We may have a reversal in place in terms of the short-term direction of the Canadian dollar,'' said Reid Farrill, executive director of foreign exchange at CIBC Worlds Markets Inc. in Toronto. ``If the major element of the story is an American recession, then it begs the question does Canada avoid that, or does Canada get dragged down with it?''
More than 80 percent of Canada's exports are to the U.S.
The Bank of Canada kept its key interest rate unchanged at 4.25 percent for a third meeting last month and predicted growth will drop to 2.5 percent next year from 2.8 percent this year.
The Canadian dollar has lost 2.9 percent versus its U.S. counterpart since May 31, when it touched a 28-year high of 91.44 U.S. cents. Traders have pared bets on the currency on declines in the price of energy and commodities.
``If the commodity prices remain relatively firm, then the Canadian dollar can weather the U.S. slowdown quite nicely,'' Farrill said.
Yields Decline
The yield on Canada's benchmark 10-year note fell about 4 basis points to 3.96 percent, the lowest since Sept. 27. The price of the 4 percent security maturing in June 2016 rose 31 cents to C$100.29. Bond yields move inversely to prices.
``This seems to be a knee-jerk reaction for bonds to improve after the news of a higher government surplus,'' said Edward Jong, who oversees C$100 million of fixed-income assets at Majorica Asset Management in Toronto, referring to yield. ``But I can't see this as a long-lasting trade. A lot of it is just a political posturing.''
Canadian 10-year government bonds yielded about 58 basis points less than comparable-maturity U.S. Treasuries. The difference was 77 basis points in May, the largest this year.