Canada's Dollar Posts Second Weekly Gain as Commodities Rebound

By Chris Fournier

Aug. 23 (Bloomberg) -- The Canadian dollar gained for a second consecutive week, boosted by a rebound in the price of commodities including crude oil and gold.

``It's been a good week for commodities and the Canadian dollar has certainly benefited from that,'' said Stefane Marion, assistant chief economist at National Bank Financial in Montreal. ``We've had a significant rebound in prices.''

The currency of Canada, which relies on commodities for about half its export revenue, appreciated 1.2 percent since Aug. 15 against its U.S. counterpart. It gained against all of the world's 16 most actively traded currencies in that period except for the South African rand.

The loonie, named after the aquatic bird on the one-dollar coin, rose 0.4 percent to C$1.047 per U.S. dollar yesterday in Toronto, from C$1.0592 on Aug. 15. One Canadian dollar buys 95.51 U.S. cents.

The currency surged 17 percent in 2007 as commodity prices soared. The rally stalled this year as the economy of the U.S., the nation's largest trading partner, cooled and as oil fell from the record high of $147.27 a barrel set July 11. The Canadian currency touched a year-low C$1.0728 on Aug. 12.

``I wonder if there's been a bit of sober second though when you see how far the Canadian dollar had fallen in such a short time span,'' said Eric Lascelles, chief economist at TD Securities Inc. in Toronto. ``It kicked in when oil was appreciating and failed to respond as sharply when oil was depreciating.''

Gold, Silver

Crude oil climbed $6.20 to $121.18 on Aug. 21 before erasing that advance yesterday. It still posted its first weekly price increase since the start of August. Gold, Silver and copper also gained this week.

The Reuters/Jefferies CRB Index of 19 commodities rose for four straight sessions before paring gains yesterday. The index posted its first weekly advance in three, and the biggest since the five days ended June 6.

The U.S. dollar has risen against all of the 16 other major currencies this month on speculation the U.S. economic slowdown is spreading to other industrialized countries.

Lascelles predicts the dollar will trade at C$1.099 against its U.S. counterpart by year-end as commodity markets weaken, while Marion forecasts the currency slumping to C$1.12. The loonie will slip to C$1.10 against the U.S. dollar by the end of 2009, according to the median forecast of economists surveyed by Bloomberg News.

`Not so Bearish'

June wholesale sales advanced 2 percent, Statistics Canada said Aug. 19, almost triple the median forecast of economists in a Bloomberg survey. Retail sales rose 0.5 percent, while consumer prices increased 0.3 percent from June, less than economists' 0.4 percent forecast.

``Some of the underlying fundamentals for Canada are pretty good,'' said John Rothfield, senior currency strategist at Banc of America Securities LLC in San Francisco. ``The market's not so bearish anymore on how many rate cuts the Bank of Canada's got to do.''

The loonie will approach parity by the end of the year, Rothfield forecasts. He said ``we have C$1.03 and C$1.02 next couple of quarters.''

The central bank's policy makers are scheduled to meet on Sept. 3, when they will leave the key rate unchanged at 3 percent, according to all seven economists polled by Bloomberg.

The yield on the two-year Canadian government bond rose 13 basis points, or 0.138 percentage point, to 2.94 percent. The price of the 2.75 percent security due in December 2010 decreased 27 cents to C$99.59. The 10-year bond's yield increased 5 basis points to 3.62 percent this week.

Bond Yield Outlook

The two-year bond's yield will rise to 3.09 percent by the end of this year, while the 10-year bond's yield will increase to 3.86 percent, according to the median forecasts of economists surveyed by Bloomberg News.

The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 25 basis points, down from 36 basis points on Aug. 11. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22.

Canadian government bonds have returned 4.3 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 3.6 percent this year.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net