Canada's Currency Declines to One-Week Low as Fed Issues Policy Statement
Canada’s dollar dropped to the lowest in more than a week as the Federal Reserve said it will take new measures to boost “more modest” economic growth in the U.S., the nation’s largest trading partner.
The Canadian currency fell versus 11 of its 16 most-traded currencies after the Fed’s decision to reinvest principal payments on mortgage holdings into long-term Treasury securities, which marked its first attempt to bolster growth since March 2009. Government bonds climbed.
“A weakening growth profile in the U.S. is negative for Canada, and that’s limiting some of the gains for the Canadian dollar,” said Camilla Sutton, director of currency strategy in Toronto at Bank of Nova Scotia, Canada’s third-largest lender.
Canada’s currency, nicknamed the loonie, depreciated 0.4 percent to C$1.0314 per U.S. dollar at 5 p.m. in Toronto, from C$1.0270 yesterday. It touched C$1.0389, the weakest level since July 29. One Canadian dollar buys 96.96 U.S. cents.
Government bonds rose, pushing the yield on Canada’s benchmark 10-year note down 4 basis points, or 0.04 percentage point, to 3.03 percent. That’s the lowest level since April 28, 2009. The price of the 3.5 percent security due in June 2020 rose 36 cents to C$103.94.
As U.S. economic growth weakened in the second quarter and company job gains in July fell short of estimates, today’s step by the Fed signaled that risks of a slowdown have increased enough for the central bank to delay its exit from unprecedented stimulus.
‘Extended Period’
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve’s holdings of securities at their current level.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”
The Standard & Poor’s 500 Index retreated 0.6 percent, and crude oil for September delivery tumbled 1.5 percent to $80.26 a barrel in New York. The loonie tends to rise and fall with stocks and commodities as a proxy for risk appetite.
The Bank of Canada may face an “inflation problem” next year as concerns the U.S. recovery may falter will keep it from raising interest rates at its last two rate announcements this year, Sheryl King, head of Canada economics at Bank of America Merrill Lynch, said in an interview at Bloomberg’s Ottawa office.
Inflation to Accelerate
The firm predicts inflation in Canada will accelerate to as high as 3.5 percent in the last quarter of 2011, which would be the fastest quarterly rate since 2003. The Canadian central bank estimates that overall and core inflation will advance at about a 2 percent pace through 2012 as the economy returns to full capacity after last year’s recession.
The Bank of Canada forecast anticipates a “gradual” rise in interest rates to keep inflation at that pace, it said last month. The central bank has raised the benchmark rate to 0.75 percent, from a record low 0.25 percent earlier this year.
King expects the central bank to increase interest rates to 1 percent in September before pausing for the rest of this year. It will boost the key rate by another 1.75 percentage points by the end of 2011, she predicted.
To contact the reporter on this story: Alex Kowalski in New York at akowalski13@bloomberg.net
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