Jan. 7 (Bloomberg) -- Options traders are the most bullish on the Canadian dollar in 13 months amid a rebound in commodity prices since the start of the year and as the U.S. appears to lapse into a prolonged recession.

Traders are paying the largest premium for Canadian dollar call options, which grant the right to buy the loonie, over puts that provide the right to sell the currency, since November 2007. The currency is dubbed the “loonie” for the aquatic bird on the nation’s one-dollar coin.

The Canadian currency fell 18 percent last year versus its U.S. counterpart as the global recession cut demand for oil, natural gas, aluminum and other commodities, which generate half the country’s exports. Economists predict the Canadian dollar will slide against the greenback again this year as falling crude prices hobble foreign investment in the country’s oil patch.

“Option traders and end-users such as hedge funds, corporate accounts and asset managers, fear downside sell-off in the exchange rate,” that is, a gain in the Canadian dollar, said Simon Smollett, senior options strategist at Calyon in London. “There is some concern for Canadian dollar strength.”

The so-called risk-reversal rate for one-month options touched as much as a 0.21 percentage point premium in favor of Canadian dollar calls. A premium for loonie calls only occurred on four other trading days since the end of the third quarter; with a previous bias for puts peaking at 3.31 percentage points in October, the largest since at least five years, when Bloomberg data begins.

‘Rebuffed’

The loonie gained 9.8 percent versus the U.S. dollar after reaching a four-year low on Oct. 28 at C$1.3017, and has appreciated 2.7 percent so far this year to C$1.1862.

Since its first touch of C$1.3017, the U.S. currency rose twice more to about C$1.30 before falling back, forming what traders call a “triple top,” a technical pattern that indicates a currency may depreciate.

“The market tried to get above C$1.30 three times and was rebuffed,” said Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago. “After the triple top,” options traders increased purchases of dollar calls.

The Canadian dollar may weaken to C$1.28 by the end of the first quarter from C$1.2221 today, according to the median estimate of 37 analysts and economists surveyed by Bloomberg. It may end 2009 at C$1.24, the poll’s results show. One Canadian dollar buys 82.31 U.S. cents.

‘Shift In Sentiment’

“A shift in sentiment regarding the U.S. dollar has been the main driver in the movement in the option risk-reversals,” in recent weeks, said Adam Cole, global head of foreign-exchange strategy at the Royal Bank of Canada in London. “Back in October we seemed to be in an environment where it was heads I win, tails you lose for U.S. dollar. Things are much more balanced now.”

The Canadian dollar has benefited as crude oil and gold prices advanced this year. A faltering at the beginning of the year in an overall rally in the U.S. dollar versus major currencies also supported the Canadian dollar. Governments’ efforts to cushion against the global economic slump reduced some of the greenback’s safe haven appeal this year.

Crude oil for February delivery has risen almost 47 percent to $47.51 a barrel on the New York Mercantile Exchange, from last year’s low of $32.4 set on Dec. 19. Oil dropped 54 percent last year, the first annual decline since 2001 when crude slipped 26 percent, and the biggest loss since trading began in 1983. Crude accounts for about a tenth of Canada’s export revenue and is the largest component of the Bank of Canada’s Commodity Price Index, accounting for 21 percent.

Tensions Easing

ICE’s Dollar Index, which tracks the dollar versus a basket of currencies comprised of the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc, increased 15 percent last year, peaking at 88.46 on Nov. 21. The index was at 82.073 today, down 7.2 percent from the November high.

“Dollar-Canada’s came off from C$1.30 level so the market feels perhaps some of the tensions may have come out of the currency,” said Steven Barrow, head of G-10 currency research in London at Standard Bank Plc. “I think they’ll come back.”

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.netLiz Capo McCormick in New York at emccormick7@bloomberg.net.

Last Updated: January 7, 2009 12:06 EST