Canada Dollar Reaches Highest Level Since 1977 on Interest Rate

Canada Dollar Reaches Highest Level Since 1977 on Interest Rate
By Haris Anwar
May 18 (Bloomberg) -- Canada's dollar climbed to the highest level in almost 30 years on speculation the Bank of Canada will raise borrowing costs in 2007 as the economy benefits from price increases in the nation's commodity exports.
The Canadian dollar had its biggest one-day gain in almost two months and has outperformed 15 of 16 most-active currencies this year as the economy rebounded from a slump in 2006. Producers of gold, copper and natural gas have been the target of foreign acquisitions this year. Interest-rate futures contracts suggest a central bank rate increase before the end of the year.
``A rate hike in July could potentially be a possibility,'' said George Davis, chief technical analyst at RBC Capital Markets in Toronto, a unit of Canada's largest bank by assets. ``The market has started to price in rate increases sooner rather than later, and that's prompting speculative interest in the currency.''
Canada's dollar rose 1 percent to 91.77 U.S. cents at 3:30 p.m. in Toronto, from 90.91 U.S. cents yesterday. Earlier it reached 91.94 U.S. cents, the highest since Oct. 10, 1977. One U.S. dollar buys C$1.0898.
As the currency's gain accelerated, some investors said Canada's dollar will soon reach parity with its U.S. counterpart. That hasn't happened since 1976.
`Parity'
``I'm a very big bull on the Canadian dollar,'' said Michael Woolfolk, senior currency strategist in New York at the Bank of New York. ``Parity is a realistic objective, but that will be really requisite on the Bank of Canada raising interest rates.'' He is forecasting parity in mid-2008.
The yield on the September bankers' acceptances futures contract rose 5 basis points, or 0.05 percentage point, to 4.59 percent on the Montreal Exchange. It has gained 17 basis points this week.
Bankers' acceptances futures have settled at a three-month lending rate averaging 16 basis points above the central bank's rate target since Bloomberg started tracking the difference in 1992.
The currency gained after retail sales rose a more-than- forecast 1.9 percent in March, the second-biggest monthly gain over the past three years, on a surge in new car sales.
Yesterday a report showed the so-called core rate of inflation, which excludes prices for items such as gasoline and fresh fruit, reached 2.5 percent in April from a year earlier, the fastest pace since 2003. The central bank monitors the core rate as a key gauge of trends.
Bank of Canada
Forecasts that the Bank of Canada may raise interest rates as early as its July 10 meeting triggered a sell-off in Canadian bonds, with the yield on the two-year government security gaining 19 basis points, or 0.19 percentage point, to 4.39 percent this week.
The nation's central bank has held borrowing costs at 4.25 percent for the past year.
``There is a possibility that the Bank of Canada will disappoint the market by not raising rates,'' said Firas Askari, head currency trader at BMO Capital Markets in Toronto, who exited his long Canadian dollar bet at C$1.0887. ``The bank will be quite reluctant to move rates at a time when the currency is doing the tightening job.'' A long position is a bet on a currency's gain.
Booming Economy
Canada's dollar reflects a booming economy that is benefiting from higher prices of crude oil and metals like copper and gold. Canada's oil sands in Alberta contain the largest crude deposits outside the Middle East, and the country is the world's No. 2 producer of nickel and zinc. Oil rose 4.1 percent this week.
The boom in commodities, sparked by demand from countries including India and China, has helped the Canadian currency surge more than 46 percent since the start of 2002.
Surging tax revenue has allowed the Canadian government to pare debt and post 10 straight budget surpluses, the lone country among the Group of Eight nations with a balanced budget, helping to bolster investor confidence in the currency. Standard & Poor's affirmed its 'AAA' long-term foreign and local currency sovereign credit ratings on Canada.
The currency's gains prompted manufacturers such as jet- maker Bombardier Inc. to push for lower borrowing costs and tax breaks. More than 200,000 factory jobs have been lost since 2003.
``For our business, it means lower revenue because so much of our sales are denominated in U.S. dollars,'' said William LeGrow, vice president of transportation and energy at West Fraser Timber Co., North America's second-largest producer of softwood lumber. ``Most lumber producers are selling at or around their cash cost.''
A 1-U.S.-cent change in the exchange rate impacts earnings by 39 Canadian cents a share, the company said in its February presentation.