Canadian Currency Strengthens as Trade Surplus Buoys Interest-Rate Outlook

The Canadian dollar rose against most of its major counterparts as an unexpected trade surplus in December encouraged speculation the Bank of Canada will raise borrowing costs sooner than other central banks.

The loonie advanced for a second week versus the yen in the longest stretch of gains since November as the Egyptian political turmoil that led President Hosni Mubarak to resign spurred demand for North American assets. Canada’s currency erased its weekly drop versus the greenback before next week’s report on inflation as the nation posted its first trade surplus in 10 months while the U.S. trade deficit widened.

“One of the reasons the Bank of Canada was cautious on raising rates was the trade deficit, but that doesn’t appear to be the case anymore with a huge surge in December,” said Blake Jespersen, director of institutional foreign-exchange sales at Bank of Montreal in Toronto. “You take away that deficit and you look at the Canadian dollar fairly stable at par and you have the market starting to price in a hike a little sooner.”

The Canadian currency advanced 1.5 percent to 84.49 yen yesterday, from 83.24 on Feb. 4. The loonie was little changed at 98.74 cents against the U.S. dollar, compared with 98.73 cents. The Canadian dollar has traded stronger than parity with the greenback since Feb. 1.

Credit market prices show investors may be anticipating high Canadian borrowing costs. The yield yesterday on the September 2011 bankers’ acceptances contract was 1.77 percent, compared with 1.59 percent on Jan. 31.