July 13, 2010 / 12:49 PM / 7 years ago

Thirst for risk drives C$ higher

3 Min Read

TORONTO (Reuters) - Canada's dollar ended higher against the greenback on Tuesday, boosted by a return of risk appetite on optimism over corporate earnings and a successful Greek auction that eased worries about euro-zone debt.

The Canadian dollar touched a high of C$1.0276 to the U.S. dollar, or 97.31 U.S. cents, its highest level since June 23, as North American equity markets finished the session firmly in the black.

Investors were in the mood to buy riskier assets after Alcoa Inc, the largest U.S. aluminum producer and seen as a bellwether for the U.S. economy, reported stronger than expected results and raised its estimate for global aluminum consumption.

That was followed by Greece's successful return to capital markets with a T-bill sale, passing its first borrowing test since securing a 110 billion euro emergency funding deal in May.

"It's pretty much the return of risk appetite that took everything risky higher. We saw oil prices increasing, commodity prices increasing, equities higher," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

The Canadian dollar finished at C$1.0337 to the U.S. dollar, or 96.74 U.S. cents, up from Monday's finish at C$1.0375 to the U.S. dollar, or 96.39 U.S. cents.

Increased risk appetite saw global equities advance on an upbeat earnings outlook, while oil prices rose above $77 a barrel on optimism for the economic recovery and stronger demand.

As well, domestic data showed that strong demand from Canadian businesses and consumers triggered a surge in imports in May that outpaced exports, leading to the third consecutive monthly trade deficit.

"The expectation was that it would be flat and the prior number was revised lower, so wider, and that has negative implications for GDP," said Camilla Sutton, currency strategist at Scotia Capital.

"But when you look at the details the imports were very strong, which is also good sign there's ongoing demand."

RBC's Strauss said key technical ranges for the currency included C$1.0219 to the U.S. dollar and C$1.0380-C$1.0415.

He added the currency would "very much a prisoner of global sentiment" until next week's Bank of Canada interest rate decision on July 20.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, are pricing in an 89 percent likelihood of a July 20 rate hike.

Risk Rally Pressures Bonds

Canadian bond prices fell across the curve as investors flocked to higher-yielding assets.

"It's part of the risk appetite returning and the market more comfortable with the global recovery story," said Strauss.

The two-year bond fell 5 Canadian cents to yield 1.711 percent, while the 10-year bond sank 50 Canadian cents to yield 3.273 percent.

Canadian bonds notched a mixed performance against U.S. issues. The Canadian 2-year bond was 105 basis points above its U.S. counterpart, compared with about 104 basis points in the previous session.

Reporting by Jennifer Kwan; editing by Rob Wilson

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