Canadian Dollar Appreciates as Central Bank Is Seen Keeping Rates Steady


By Chris Fournier - Mar 7, 2012 2:16 PM PT
Canada’s dollar advanced versus its U.S. counterpart as policy makers prepared for a meeting tomorrow that economists predict will see interest rates remaining at 1 percent for a 12th time.
The currency rose against the euro and the majority of its most-traded peers amid concernGreece won’t get sufficient private-sector participation in a debt swap. Traders will be watching Canadian and U.S. jobs reports on Feb. 9 for signs that the North American economic recovery is intact.
“The market was caught long U.S. dollars, so there’s a bit of a pain trade as we drift back under parity,” Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, said of traders who had to cover bets the U.S. dollar would rise by buying Canadian dollars.“There’s plenty of event risk going into Friday’s numbers, so the market isn’t holding onto positions for very long.”
Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, rose 0.5 percent to 99.74 cents per U.S. dollar at 5 p.m. in Toronto after touching C$1.0029 yesterday, the weakest level since Feb. 27. One Canadian dollar purchases $1.0024.
The Bank of Canada will leave its benchmark interest rate at 1 percent, where it’s been for more than a year, according to all 28 responses in a Bloomberg survey.
Investors are renewing bets for the first time in six months that Bank of Canada Governor Mark Carney’s next move will be to raise borrowing costs amid signs of an improving U.S. economy.

‘More Modest’

The 12-month overnight index swap rate, which is tied to forecasts for the Bank of Canada’s policy rate, advanced to a seven-month high of 1.024 percent March 1. That would suggest odds of a rate increase by October of more than 20 percent, according to Bloomberg calculations, up from zero probability a month earlier.
Policy makers led by Carney said after the bank’s most recent decision on Jan. 17 growth in Canada and the U.S. will be “more modest” than forecast in October as European leaders struggle to contain a debt crisis.
The meeting will be a non-event unless Carney “changes the mantra,” Askari said. “We’ll scour the statement for changes, such as hints of hikes quicker than anticipated due to the global crisis subsiding.”

Jobs Reports

Canadian employers added a net 15,000 jobs last month, economists in a Bloomberg survey forecast before the government issues the data March 9. Payrolls grew by 2,300 in January.
The U.S. Labor Department may say on the same day that total payrolls rose by 210,000 last month, according to the median estimate of economists surveyed by Bloomberg News. It would mark the strongest three-month stretch in almost a year. The jobless rate may have held at a three-year low of 8.3 percent.
“We’re waiting for employment on Friday,” said Firas Askari, head currency trader at Bank of Montreal (BMO) in Toronto. “The U.S. showing signs of stabilizing will be more Canadian- dollar friendly than anything else.”
Implied volatility for one-month options on Canada’s dollar versus the greenback increased from the lowest level in almost five years. It touched 8.39 percent today after reaching 6.90 percent on Feb. 24, the least on an intraday basis since June 2007. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. The five-year average is 12 percent.

Weekly Gains

The Canadian dollar gained 0.2 percent over the past five days, while the yen and the U.S. dollar each rose 1.6 percent, the highest among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes.
Crude for April delivery rose 1.1 percent, to $106.20 a barrel on the New York Mercantile Exchange. The Thomson Reuters/Jefferies CRB Index of raw materials declined 0.1 percent after falling 1.6 percent yesterday, paring the year’s gain to 2.9 percent. The MSCI World Index rose 0.4 percent.
“We’re fairly favorable on commodity currencies,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. (BK) “I would prefer to hold the Canadian dollar heading into a period of uncertainty in the euro zone, than holding the Australian dollar. The Canadian dollar benefits from a strengthening U.S. economy.”
Shorter-term government bonds fell, pushing benchmark two- year yields four basis points, or 0.04 percentage point, higher to 1.12 percent. The price of the 0.75 percent bonds due in May 2014 fell 8 cents to C$99.25.
The difference in yields between Canadian and U.S. two-year bonds widened to 81 basis points today, from 72 at the end of 2011, amid increasing expectations Carney will raise rates.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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Brazil Speeds Up Interest Rate Cuts to Single Digit to Revive GDP Growth


By Andre Soliani and Matthew Bristow - Mar 7, 2012 7:25 PM PT 
Brazil’s central bank surprised analysts by accelerating the pace of interest rate cuts, bringing borrowing costs below 10 percent for only the second time amid signs of lackluster growth inLatin America’s biggest economy.
In a split vote yesterday, policy makers led by bank President Alexandre Tombini cut the Selic (BZSTSETA) rate by 75 basis points to 9.75 percent. Two dissenting members voted to lower the rate by a half point for a fifth straight meeting.
“They just lost patience,” Nomura Securities’ Tony Volpon, one of just two economists who anticipated the move in a Bloomberg survey of 62 analysts, said yesterday in a phone interview from New York. “The government clearly is afraid given what they know up to now that 2012 could be another weak growth year, and they want to buy insurance against that.”
A report yesterday showing industrial production in January fell by the most in three years may have tipped the balance in favor of a deeper cut. The government believes that “drastically” reducing real interest rates that are the second-highest in the Group of 20 richest nations afterRussia will also help fight currency gains, said Volpon, the chief emerging markets economist for the Americas at Nomura. The real has gained 31 percent since 2008, more than the 25 most-traded emerging market currencies tracked by Bloomberg.
The bank’s one-sentence statement didn’t explain why it was acting more aggressively, though Volpon expects another 75 basis point cut in April followed by a half point reduction to 8.5 percent in May.

Inflation Concerns

The bank’s strategy may heighten inflation concerns.
Even after the pace of price increases has slowed in recent months, economists are doubtful that Tombini can fulfill his pledge to lower inflation to the government’s 4.5 percent target as unemployment hovers near a record low and credit growth of 18 percent fuels consumer demand.
Forecasts for 2013 inflation have risen in each of the three previous weekly central bank surveys of economists, to 5.2 percent. In January inflation was 6.22 percent, down from 7.31 percent in September.
Tombini began lowering the benchmark rate in August, saying in each of the meetings before yesterday that “moderate” reductions in borrowing costs would shield the economy from the euro debt crisis. In January the bank said there was a “high probability” the rate would drop to less than 10 percent as inflation concerns subside.

Traders Less Surprised

Traders boosted bets for a bigger rate cut this month as evidence mounted that the economy is growing at a level weaker than was previously expected. The yield on the interest rate futures contract maturing in January 2013, the most exchanged in Sao Paulo yesterday, has fallen 42 basis points to 8.91 percent since Feb. 28.
The 2.1 percent decline in industrial output in January, the biggest drop since December 2008, followed a report this week showing that Brazil’s $2.3 trillion economy last year had its second-worst performance since 2003. Gross domestic product expanded 2.7 percent in 2011, less than Brazil’s neighbors and below the 3 percent growth by Germany amid the euro debt crisis.
Besides lowering borrowing costs, Rousseff’s government has cut taxes on consumer goodsand is boosting public investments to ensure 4.5 percent growth this year. Economists expect weaker growth of 3.3 percent, according to the most-recent bank survey.

’Single Digit’

“They knew that they wanted to get to a single digit and they saw a window of opportunity to accelerate,” said Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. Still, Ramos cautioned against predicting a deeper easing cycle than the market was anticipating, saying that policy makers may simply be frontloading already-planned cuts.
“It could be that the growth and inflation picture will change by May, and then it’s not as easy to continue to cut,” he said in a telephone interview from New York yesterday.
Since Brazil began targeting inflation in 1999, the Selic has only once before fallen below 10 percent, in the wake of the 2008 global financial crisis.
Roberto Padovani, chief economist at Votorantim Corretora, said the bank’s strategy will depend increasingly on non- monetary tools such as tighter banking regulations to contain inflation.
“Economists have to understand they’ve changed their instrument,” Padovani said yesterday in a phone interview from Sao Paulo, adding the Selic may fall to 8.5 percent during the current easing cycle.
A rally in the currency that is hurting manufacturers that compete with cheaper imports is also a top concern. Brazil’s benchmark rate is a magnet for investors borrowing at near-zero rates abroad. So far this year, $15.5 billion has entered the country, compared with investment outflows of $3 billion in the last quarter of 2011.
Rousseff, on a trip to Germany this week, said her government would spare no effort to protect manufacturers from a “monetary tsunami” triggered by loose credit conditions in Europe and the U.S. The real has strengthened 5.7 percent against the dollar this year, the fourth-biggest gainer among the 16 most-traded currencies tracked by Bloomberg.
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Matthew Bristow in Brasilia at mbristow5@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman atjgoodman19@bloomberg.net
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Eurodollar Puts Climb as Hedge Against Bernanke’s 2014 Zero-Rate Pledge


Trading in options that profit if implied yields on Eurodollar futures expiring in two years rise has increased this month relative to those that gain should they fall, hedging the risk that interest rates won’t stay low through the end of 2014.
Prices of Eurodollar futures contracts that expire in 2014 rose to this year’s high after theFederal Reserve said in January that the economy may warrant holding the target lending rate at zero to 0.25 percent at least through late 2014. Prices have fallen since Fed Chairman Ben S. Bernanke refrained last week in congressional testimony from signaling more asset purchases under quantitative easing are imminent.

“The data suggest to us that people are buying puts,” said Todd Colvin, a senior vice president at R.J. O’Brien. “People that are long in this area of the curve may be hedging the chance of something happening to trigger a rise in rates. There has also been some normalization in rates since January, when the Fed pledged to keep rates low through 2014.”Volume in the March so-called mid-curve put options, whose value is based on Eurodollar contracts expiring in 2014, has been four times that for calls since March 1, according to CME Group data tracked by R.J. O’Brien & Associates, a Chicago-based futures brokerage. Open interest in puts rose by 200,000, while that for calls increased by 13,000 through March 6. Puts grant the right to sell the underlying futures, and calls grant the right to buy. Open interest is the total number of contracts that have not been closed, liquidated or delivered.

Eurodollar Contract

The March 2014 Eurodollar contract traded at 99.225 yesterday, for an implied yield of 0.775 percent. That’s up 0.180 percentage point from an implied yield of 0.605 percent on Feb. 2, when the contract reached the year’s high of 99.395. The implied yield was 0.840 percent on Jan. 24, the day before the Federal Open Market Committee extended its pledge to keep borrowing costs low.
The implied yield on Eurodollar futures, moving in the opposite direction of price, reflects expectations for the three-month dollar London interbank offered rate and changes in the Fed’s monetary policy. A put option increases in value if implied yields of the underlying futures rise, while a call option’s value would decline.
Bernanke said following the January policy meeting that the central bank was considering another set of purchases after buying $2.3 trillion of Treasury and mortgage-related bonds from 2008 to 2011 to stimulate the economy. He affirmed last week in congressional testimony that interest rates are likely to stay low at least through late 2014 without offering any indication that further monetary easing was likely.
Eurodollars are dollars held in commercial banks outside the U.S. A futures contract is an agreement to sell or buy a specific amount of a commodity or security at a specific price and time.
The London interbank offered rate, or Libor, for three- month dollar loans was fixed yesterday at 0.4746 percent, down from a high this year of 0.5825 percent on Jan. 3.
To contact the reporter on this story: Liz Capo McCormick in New York atemccormick7@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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Yen Drops as Japan Posts Record Current-Account Deficit, Topping Forecasts


By Masaki Kondo and Monami Yui - Mar 7, 2012 11:05 PM PT
The yen weakened against all of its major peers after Japan posted a record current-account deficit, threatening to undermine the currency’s haven status.
The euro advanced for a second day against the yen and the dollar before Greece’s debt-swap offer to private creditors concludes at 10 p.m. Athens time today. The dollar was 0.7 percent from a nine-month high against the yen as speculation eased that the Federal Reserve will provide further stimulus. The New Zealand dollar gained versus 15 of its 16 peers as Asian stocks extended a global rally, boosting demand for higher- yielding currencies.
“Japan’s current-account deficit exceeded expectations, fueling concerns about its economic growth and fiscal problems,” said Yuji Saito, director of the foreign-exchange department inTokyo at Credit Agricole CIB. “This is spurring selling of the yen.”
The yen fell 0.3 percent to 81.30 per dollar as of 7:02 a.m. in London from the close in New Yorkyesterday after touching 81.87 on March 2, the weakest since May 26. It lost 0.5 percent to 107.11 per euro. The 17-nation euro strengthened 0.2 percent to $1.3170.
Japan posted a current-account deficit of 437.3 billion yen ($5.4 billion) in January, the Ministry of Finance said today. That is the biggest shortfall since comparable data began in 1985 and was more than the median estimate of a 320 billion-yen gap in a Bloomberg News survey of economists.
Separate figures showed Japan’s economy contracted less than the government’s initial estimate last quarter.

Greece Bailout

The euro rallied yesterday against the yen and dollar as German Finance Minister Wolfgang Schaeuble said he’s “quite optimistic” that the so-called private-sector involvement element ofGreece’s bailout will succeed.
Investors with about 60 percent of the Greek bonds eligible for the debt swap have indicated they will participate, according to data compiled by Bloomberg from company reports and government statements. That would put the country on the verge of the biggest sovereign restructuring in history.
The Greek government has said it wants participation above 90 percent and is seeking a minimum level of 75 percent. The country is ready to force holders to accept the plan if necessary, Finance Minister Evangelos Venizelos said in a Bloomberg Television interview this week.
The euro has fallen 2.7 percent in the past three months, the second-worst performance among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has weakened 6.3 percent, and the dollar has declined 1.3 percent.

U.S. Jobs

The number of Americans filing first-time claims for jobless benefits was unchanged at 351,000 in the week ended March 3, according to the median of economist estimates in a Bloomberg News survey before the figures are released today. That would match the lowest level since March 2008.
Another report from the Labor Department may show tomorrow that U.S. nonfarm payrolls increased by 210,000 last month after rising 243,000 in January, a separate survey of economists shows.
The Fed, which next meets March 13, bought $2.3 trillion of securities in two rounds of so-called quantitative easing, or QE, from December 2008 to June 2011.
“U.S. jobs data is quite important to predict the direction of the dollar-yen because it depends on economic and monetary policy outlooks in the U.S.,” said Yuki Sakasai, currency strategist atBarclays Capital in New York. “If the data confirms a recovery in the labor market, it will reduce the likelihood of QE3 and act as a support to the dollar.”
The MSCI Asia Pacific Index (MXAP) of shares advanced 1.2 percent today, snapping a three day decline. The Standard & Poor’s 500 Index climbed 0.7 percent in New York yesterday.

N.Z. Rate

The New Zealand dollar, known as the kiwi, added 0.6 percent to 82.11 U.S. cents, erasing an early 0.3 percent decline. The Australian dollar, nicknamed the Aussie, rose 0.3 percent to $1.0609.
“If we get a slightly better employment report, we could see stocks tick higher, and then in turn the Aussie and kiwi rally on the back of that,” Jeremy Jukes, a foreign-exchange dealer in Auckland at Velocity Trade Ltd., said about the U.S. figures. “We have a slight positive bias” for both currencies.
The Reserve Bank of New Zealand today left its official cash rate at 2.5 percent. Governor Alan Bollard said the RBNZ’s forecasts “are not inconsistent with a story that would see that remaining in place for much of this year.”
To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
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