April 12, 2010 / 12:34 PM / 7 years ago

Canada dollar rises closer to parity after BoC survey

4 Min Read

TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Monday and came within spitting distance of parity after Bank of Canada surveys pointed to an upbeat business mood, enhancing the market notion that the central bank would raise interest rates at midyear.

The currency rose as high as C$1.0011 to the U.S. dollar, or 99.89 U.S. cents, after the Bank of Canada reports were released.

"The Canada specific portion of it really comes down to the appreciation that we saw ... with the business outlook survey in Canada reflecting reasonably well on the Canadian economy and the loonie, and allowing it to spread its wings a little bit," said Eric Lascelles, chief economics and rates strategist at TD Securities.

The Canadian dollar finished at C$1.0033 to the U.S. dollar, or 99.67 U.S. cents, slightly higher than Friday's close of C$1.0040 to the U.S. dollar, or 99.60 U.S. cents.

The central bank has kept its key overnight interest rate at a historic low of 0.25 percent since April 2009, pledging to maintain that level until the end of June, unless inflation threatens to spiral out of control.

The bank's surveys indicate that the economic recovery is on track, said Matthew Strauss, senior currency strategist at RBC Capital Markets, and support "the notion the Bank of Canada will have to move on interest rates once the conditional commitment expires".

The release of the surveys coincided with comments by Finance Minister Jim Flaherty, who repeated that the recent rise by the currency has been "relatively orderly".

Flaherty's comments soothed any potential market jitters about the currency's rise, Strauss said.

"(The government) continues to emphasize or imply that it's mostly fundamentals that have driven the Canadian dollar to current levels rather than by speculation, i.e. from their side they seem pretty comfortable with the current levels with the Canadian dollar," he added.

The currency's rise was also underpinned by news that Chinese state-owned company Sinopec plans to buy ConocoPhillips' stake in the largest project in Canada's oil sands for $4.65 billion. [ID:nN12190582] The news fueled speculation that more deals in the oil sands could follow, and that subsequent merger and acquisition-related currency flows could support the Canadian dollar.

Data on Monday showed Canadian housing starts unexpectedly dipped 1.5 percent in March, but the two previous months were revised higher, suggesting the residential housing sector remains a positive factor in the country's economic recovery.

Early in the day, the currency weakened as euro zone finance ministers agreed to a rescue package for Greece, sparking a rush to buy the European currency.

The ministers approved a 30 billion euro ($40.5 billion) aid package of loans.

The euro rose to its highest level against the greenback in nearly a month on Monday.

Bond Prices Sag

Canadian bond prices were flat to lower across the curve as the market reacted to the Bank of Canada surveys.

"It really is dwelling exclusively on the business outlook survey," TD's Lascelles said.

"The business outlook survey reflects quite well on Canada's growth prospects and suggests again that, perhaps not that the Bank of Canada hikes sooner, but it confirms the thinking that the Bank of Canada is in play and will be moving (to raise rates) before too long," he said.

Bond prices typically fall when rates are on the rise as their fixed payments look less attractive in comparison with the rising yields on other short-term investments.

The two-year government bond limped 2 Canadian cents lower to C$99.35 to yield 1.855 percent, while the 10-year bond fell 12 Canadian cents to C$100.65 to yield 3.666 percent.

Canadian government bonds mostly underperformed U.S. issues, with the Canadian two-year yield 82 basis points above its U.S. counterpart, compared with around 78 basis points the previous session.

Additional reporting by Ka Yan Ng; editing by Peter Galloway

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