Canada's Dollar Gains for a Second Week on Bank Comments, Data

By Jamie McGee

July 18 (Bloomberg) -- Canada's dollar strengthened for a second week after the central bank cited improved trade and reports on manufacturing shipments and wholesale sales exceeded forecasts.

The Canadian dollar increased versus 11 of the 16 most- traded currencies, rising 0.3 percent against its U.S. counterpart since July 11. It has gained 1.5 percent this month.

``The impression is the central bank would welcome some Canadian dollar strength,'' said David Watt a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank. ``Shipments and wholesale trade helped. It is showing remarkable resistance to the headwinds it's been facing. That reflects improved terms of trade from the Bank of Canada's perspective.''

The currency was little changed today at C$1.0071 per U.S. dollar at 2:20 p.m. in Toronto, from C$1.0058 yesterday and C$1.0092 on July 11. One Canadian dollar buys 99.31 U.S. cents. It has traded near parity with its U.S. counterpart this year and touched a 2008 low of C$1.0379 on Jan. 22, and a high of 97.12 cents per U.S. dollar on Feb. 28.

Wholesale sales rose 1.6 percent in May, compared with a revised 1.5 percent gain in April. Economists surveyed by Bloomberg News forecast 0.5 percent.

Shipments increased 2.7 percent in May, after a revised 2.1 percent increase during April.

International investors bought a net C$10.7 billion ($10.64 billion) of Canadian securities in May, compared with the C$3.5 billion forecast.

`Pretty Strong Shape'

``We got a relatively upbeat assessment from the Bank of Canada's governor yesterday,'' said Don Drummond, chief economist at Toronto-Dominion Bank in Toronto. ``He held with the argument that the Canadian economy is in pretty strong shape and gave a strong indication he doesn't intend to cut interest rates.''

The central bank issued its monetary policy report yesterday. ``Although economic growth in Canada in the first quarter of 2008 was weaker than expected, final domestic demand -- supported by strong terms of trade -- continued to expand at a solid pace,'' the central bank said.

Annualized gross domestic product in the first quarter shrank at an 0.3 percent pace, compared with the median forecast in a Bloomberg survey for 0.4 percent growth.

The central bank kept its overnight lending rate at 3 percent on July 15 for the second consecutive meeting, after lowering borrowing costs four times since December.

Currency Forecast

The Canadian dollar will weaken to C$1.06 in the first quarter of 2009, according to the median estimate of 32 economists surveyed by Bloomberg News.

Gains in the currency were limited this week as crude oil fell from an all-time high of $147.27 per barrel on July 11. It reached as low as $128.54 today. Alberta holds the largest crude reserves outside the Middle East.

``Natural gas draws a fraction of the interest of the oil sands,'' Watt wrote in a note today. ``However, natural gas has an important direct link to Canada's trade surplus, and thus to the Canadian dollar. With Canada's trade surplus rising to C$5.5 billion ($5.47 billion) in May, the energy trade surplus hit a record high of C$7.2 billion.''

The yield on the two-year Canadian government bond fell 4 basis points this week, or 0.04 percentage point, to 3.13 percent. The price of the 3.75 percent security due in June 2010 rose 5 cents to C$101.11. The 10-year bond's yield increased 1 basis point during the period to 3.79 percent.

The 10-year bond yielded 66 basis points more than the two- year security, rising from 61 basis points on July 11.

Canada's two-year bond yield will rise to 3.16 percent by the end of this year, with the 10-year yield increasing to 3.87 percent, according to the median forecast in a Bloomberg survey.

The U.S. 10-year Treasury note yielded 26 basis points more than the comparable-maturity Canadian bond, increasing from 18 basis points a week ago.

Canadian government bonds have returned 2.9 percent this year. U.S. Treasuries have returned 2.2 percent in 2008, according to Merrill Lynch & Co. index statistics.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net