November 28, 2012 / 9:50 PM / in 5 years

Canada dollar strengthens on positive U.S. budget talks

TORONTO (Reuters) - The Canadian dollar firmed against the U.S. dollar on Wednesday as market sentiment improved on hopes that a deal can be reached on the U.S. “fiscal cliff”.

President Barack Obama said he hopes he can reach agreement with Congress before Christmas to shrink the U.S. budget deficit and forge an agreement to avoid a package of tax increases and spending cuts scheduled to kick in at the end of the year that threaten a U.S. recession.

U.S. House Speaker John Boehner, an Ohio Republican, said he is willing to put revenues on the table if accompanied by spending cuts.

“Risk appetite is better. The fiscal cliff seems to be moving toward a resolution,” said Adam Button, currency analyst at ForexLive in Montreal, who added that the optimism should help the Canadian dollar strengthen through C$0.99, or $1.01, in the near future.

“The fuse may not be lit on the fiscal cliff in the way in the way we thought it might be ... It’s early on, admittedly, but it looks at this point it could be a relatively painless decision.”

The Canadian dollar finished the North American session at C$0.9919 to the U.S. dollar, or $1.0082, stronger than Tuesday’s finish at C$0.9947, or $1.0053.

Earlier in the session, the currency touched C$0.9962, its weakest level this week against the greenback, before strengthening. “That tells me there’s a strong appetite to buy Canadian dollars as we approach parity,” Button said.

The currency has been trading between C$0.9875 and C$1.0057 for more than a month.

Canada’s performance was mixed against other major currencies on Wednesday. It outperformed the euro, but underperformed the Australian dollar.

“Canada still seems an okay story but there’s uncertainty around the U.S. ‘fiscal cliff’ (and there is) still uncertainty around some of the big M&A deals, the Nexen and Progress deals,” said Shane Enright, executive director of foreign exchange sales at CIBC World Markets.

China’s state-owned CNOOC Ltd (0883.HK) and its Canadian takeover target Nexen Inc NXY.TO said on Tuesday they have withdrawn and resubmitted an application for U.S. approval of their $15.1 billion deal.

Meanwhile, Canada said it will update guidelines on foreign investment and announce “in the near future” its verdict on the Nexen deal and a bid by Malaysia’s Petronas PETR.UL for Progress Energy Resources Corp (PRQ.TO).

“(Nexen) is the major near-term catalyst for the Canadian dollar. A positive ruling on Nexen would set the stage for Canadian dollar strength,” Button said.

He noted also that U.S. economic data continues to improve. “The holiday season looks like it’s going to be solid and the economy is picking up south of the border. That’s number one for the Canadian dollar.”

Prices for Canadian government debt were higher across the curve, with the two-year bond up 1 Canadian cent to yield 1.090 percent and the benchmark 10-year bond rising 12 Canadian cents to yield 1.716 percent.

Additional reporting by Alastair Sharp; Editing by Peter Galloway

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