RPT-CANADA FX DEBT-Canada dollar hits 11-week high on stimulus hopes

Mon Jul 30, 2012 4:29pm EDT
 
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* C$ ends at C$1.0018 vs US$, or 99.82 U.S. cents
    * Currency nears one-to-one footing with greenback
    * Bond prices higher across the curve

    By Jennifer Kwan
    TORONTO, July 30 (Reuters) - Canada's dollar climbed to an
11-week high against the U.S. dollar on Monday as expectations
rose that the European Central Bank and the U.S. Federal Reserve
will provide stimulus to support their respective struggling
economies.
    U.S. Treasury Secretary Timothy Geithner and Germany's
Finance Minister Wolfgang Schaeuble issued a joint statement
after their meeting on Monday that emphasized "the need for
policymakers to adopt and implement all reform steps required to
deal with the financial crisis and crisis of confidence."
    That sent broader equity markets higher, adding to the
positive from last week when ECB President Mario Draghi's pledge
on Thursday to do whatever is necessary to protect the euro zone
from collapse. 
    "There's some optimism that is being built into market right
now. That optimism typically will equate to weakness in the U.S.
dollar," said Jack Spitz, managing director of foreign exchange
at National Bank.
    "So the Canadian dollar should do better from a value
proposition when economic times or the perception of economic
times is improving," he added.
    The Canadian dollar ended at C$1.0018 against the
greenback, or 99.82 U.S. cents, slightly firmer than Friday's
North American session close at C$1.0044, or 99.56 U.S. cents.
    The rhetoric raised expectations that the ECB could take
bold measures. But some investors doubt that ECB policymakers
will deliver in line with market expectations when they meet on
Thursday, and with September shaping up to be a "make-or-break"
month in the search for a resolution to the three-year-old euro
zone debt crisis. 
    "I think we go into the ECB meeting with the market having
quite elevated expectations that the ECB may do something," said
Adam Cole, global head of FX strategy at RBC Capital Markets in
London.
    "On balance, I think if anything, there's probably scope for
disappointment as the ECB rarely puts together policy in a hasty
fashion at the best of times, and now, in particular there seems
to be little incentive for them to do that."
    The euro fell on Monday, hitting a record low against the
Australian dollar, amid worries the ECB may disappoint investors
hoping for more actions to contain the euro zone's debt crisis.
 
    The U.S. Federal Reserve also holds a policy meeting on
Tuesday and Wednesday. Speculation is growing that the Fed will
do more to bolster recovery, after data showed U.S.
second-quarter gross domestic product expanded at a 1.5 percent
annual rate, the weakest pace of growth since the third quarter
of 2011.
    U.S. non-farm payrolls data on Friday is expected to provide
markets with further direction.
    "Until we get to some of these big event risks on Wednesday,
Thursday, Friday, the momentum still seems to be downward for
dollar/Canada," added RBC's Cole. "(I) wouldn't be surprised if
we did continue to tick down ... possibly through parity in the
early part of the week."
    He cautioned, however, that any disappointing policy
announcements from the two major central banks or a soft U.S.
jobs number would threaten the Canadian dollar's recent rally.
    Spitz also said thinner volumes could be exaggerating
Canadian dollar moves.
    "The overall volume of business has been thinned out today
recognizing not only the Olympic coverage, but the veritable
plethora of event and data that will be coming up this week," he
said, noting the currency will likely trade in a tight range of
C$0.9980 to C$1.01 against the greenback.
    Canadian bond prices edged higher across the curve with the
two-year bond up 3 Canadian cents to yield 1.097
percent, and the benchmark 10-year bond up 45
Canadian cents to yield 1.700 percent.