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Canadian dollar jumps as ECB moves to curb high borrowing costs

Federal Finance Minister Jim Flaherty holds the commemorative one dollar coin minted by the Royal Canadian Mint to mark the 100th Grey Cup in Toronto on Monday Aug. 27, 2012.


The Canadian dollar surged Thursday on relief that euro zone officials are finally coming to grips with the region's debt crisis.

The loonie rose 0.83 of a cent to $1.0175 (U.S.) after the European Central Bank announced a bond buying program to help alleviate the high borrowing costs of the most vulnerable members of the euro zone, including Spain and Italy.

ECB president Mario Draghi said the program, called Monetary Outright Transactions, will see the ECB buy up sovereign bonds on the secondary bond market, where previously issued securities are traded.

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Mr. Draghi said the program will have no set limit and be a "fully effective backstop."

But the program comes with strict conditions — countries that want the ECB to buy their bonds must first officially ask for help from Europe's bailout funds and agree to "strict and effective" budget policy conditions.

Spain and Italy have been forced to pay yields in the 7 per cent range on their benchmark 10-year bonds this year, a level that raised worries those countries could be forced to seek a bailout, following a path taken by Greece, Ireland, Portugal and Cyprus.

However, analysts cautioned that there are limits as to how effective the bond buying program will be in providing an overall fix to the euro zone's debt crisis.

"The extra money that it can provide could prove crucial," said a commentary from Capital Economics.

"But the bank is still not prepared to do governments' work for them and questions remain over whether those in the periphery and the core are prepared to do what is required of them."

Before Mr. Draghi's announcement, the ECB said that is was leaving its key interest rate unchanged at 0.75 per cent.

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There was also positive U.S. economic news.

A day before the release of the August jobs report, payroll firm ADP said the U.S. private sector created 201,000 jobs last month, much higher than an expected reading of 140,000.

Expectations for the government report have been modest with economists forecasting the economy created only about 127,000 jobs last month. Traders have been hoping that a weak report would further convince the U.S. Federal Reserve to embark on another round of stimulus.

Canadian employment data will also be released Friday. Statistics Canada is expected to announce the economy cranked out about 11,000 jobs.

Also, the Institute for Supply Management's reading on the U.S. service sector showed greater than expected expansion in August, rising to 53.7, from 52.6 in July. Economists had expected a reading of 52.5.

Oil prices were also higher amid hopes that a fix for the euro zone debt crisis would help get parts of Europe out of recession and improve demand prospects.

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The October crude contract on the New York Mercantile Exchange gained 17 cents to $95.53 a barrel.

December copper ticked 1 cent lower at $3.52 a pound, giving up some of Wednesday's 6 cent gain.

December bullion gained $11.60 to $1,705.60 an ounce.

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