Canadian dollar keeps on rising...now is the time to buy that second home in Mexico

By Haris Anwar

Oct. 25 (Bloomberg) -- Canada's dollar approached a record high set in 1974 as demand for commodities increased and the U.S. dollar weakened against most major currencies.

The Canadian currency touched $1.0401 for the first time since May 1974 as crude oil traded above $89 a barrel in New York. Commodities account for about half of Canada's exports.

``We're seeing a nice bounce in oil,'' said Steve Butler, director of foreign exchange trading at Scotia Capital Inc. in Toronto. ``Investors feel better today.''

The Canadian dollar rose 0.1 percent to $1.0332 at 1:28 p.m. in Toronto after earlier approaching the May 1974 peak of $1.0412, the high for Bloomberg data, which begins in February 1971. The Bank of Canada let the currency float in 1970. One U.S. dollar buys 96.79 Canadian cents.

Canada's dollar, nicknamed the loonie after the image of the national bird on the one-dollar coin, is the best performer against the U.S. dollar this year among the most-actively traded currencies. It has gained 20.6 percent since December. Canada's dollar reached parity with the U.S. dollar on Sept. 20 for the first time since 1976.

The U.S. dollar was trading lower against 14 of 16 most- traded currencies today, with the British pound and Mexican peso the exceptions, as reports showed U.S. orders for durable goods unexpectedly dropped, while initial jobless claims were higher than forecast, signaling economic growth is weakening.

The appeal for Canadian assets increased after the yield on the government 10-year benchmark bond moved almost equal to the similar maturity U.S. Treasury note for the first time since May 2005.

Narrowing Spread

The Canadian 10-year bond yielded 6 basis points, or 0.06 percentage point more than the U.S. Treasury note, on speculation that the Federal Reserve will cut its benchmark borrowing cost, while the Bank of Canada will remain on hold to weather the economic slowdown prompted by the U.S. housing recession.

``The narrowing yield spread is showing better Canadian growth prospects in contrast to the U.S.,'' said Mark Chandler, a senior fixed-income strategist at RBC Capital Markets in Toronto. ``Canada's positive yield, low inflation and sound debt fundamentals will attract more offshore investment.''

The yield on the 10-year benchmark Canadian government bond fell 1 basis point to 4.27 percent, the lowest since Sept. 10. The price of the 4 percent security maturing in June 2017 rose 10 cents to C$97.89. Bond yields move inversely to prices.

The currency gained less against the dollar than a dozen other major currencies as the nation's largest oil producing province, Alberta, considers imposing new royalties on energy companies, traders said.

Alberta Energy Tax

A government-appointed panel last month recommended Alberta increase oil and natural-gas royalties and impose a new tax on tar-sands developments to boost government revenue by 20 percent, or about C$2 billion ($2.06 billion) annually. The report suggested the changes apply to all projects without exemption. Premier Ed Stelmach is scheduled to announce revisions later today.

Calgary-based Suncor Energy Inc, the world's second-largest producer of oil from Alberta's tar sands, said today the soaring Canadian dollar was reducing its margins despite higher oil prices.

``We're kind of in shock like the rest of everybody else'' by the Canadian dollar's rise, said Suncor Chief Executive Rick George today during a conference call with analysts and reporters. The rise in Canada's currency blunts the impact of record oil prices, which reached a high of $90.07 on Oct. 19 in New York, George said.

``With this Canadian dollar, it feels about the same as if crude was about 60 bucks,'' he said. ``The majority of your costs are in Canadian dollars so your operating costs are going up, so you're feeling the squeeze from the bottom. It certainly is impacting the business.''

To contact the reporter on this story: Haris Anwar in Toronto at hanwar2@bloomberg.net