Loonie rises, Bank of Canada says risks to financial system have moderated

TORONTO – The Canadian dollar closed higher Tuesday amid Bank of Canada data indicating improving conditions in the financial system and rising commodities.

The loonie was up 0.28 of a cent at 94.31 cents US as the central bank said the chances of another financial crisis were not as high as they were in June, reflecting an improvement in the European government debt situation.

Officially, the bank now rates overall risk as “elevated,” one rung lower than the high level it has had in place since December 2011. The worst risk level in the bank’s rating system is “very high.”

But while it says conditions appear to be improving worldwide, the Bank of Canada’s governing council makes no attempt to hide its continuing nervousness about the Canadian housing sector and near-record levels of household debt.

The major U.S. report of the week, retail sales for November, comes out on Thursday. Economists expect a rise of 0.6 per cent, largely driven by higher auto sales.

Meanwhile, traders also took in positive data from the world’s second-largest economy.

China’s factory production rose 10 per cent in November from a year earlier, slightly lower than analysts’ forecasts. But retail sales rose 13.7 per cent, which was stronger than expected.

Commodity prices were higher with the January crude contract ahead $1.17 at US$98.51 a barrel — its highest close since Oct. 28 — amid optimism that data out Wednesday will show another sizable drawdown of American crude inventories.

March copper rose a penny to US$3.27 a pound while February gold bullion gained $26.90 to US$1,261.10 an ounce.

There was also uncertainty on financial markets about what the U.S. Federal Reserve may do about its asset purchase program.

Investors have been betting that the Fed likely wouldn’t start tapering its US$85 billion of bond purchases until well into 2014. But a slate of strong economic data last week on manufacturing, consumer confidence and employment raised speculation that the central bank could act a lot sooner, maybe as early as next week when the Fed makes its next announcement on interest rates.