Canada Dollar Touches Six-Month Low Before Central Bank Meeting

Canada’s dollar touched a six-month low versus its U.S. counterpart before a central-bank meeting tomorrow during which policy makers are expected to back away from signaling higher interest rates.

The Canadian currency declined against the majority of its most-traded peers as orders to U.S. factories unexpectedly fell in April, fanning speculation a worsening European debt crisis is reducing global growth and demand for Canadian raw-material exports. Canada’s dollar fluctuated against the greenback before the Bank of Canada is expected to maintain its benchmark interest rate at 1 percent, where it has been since September 2010, according to all 27 forecasts compiled by Bloomberg.

“It will be interesting to see how the Bank of Canada adjusts to external headwinds from Europe,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “There’s a risk that the statement is a lot more dovish.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, closed 0.2 percent higher at C$1.0394 per U.S. dollar. It touched C$1.0447, the lowest level since Nov. 28. One Canadian dollar buys 96.20 U.S. cents.

Yields on the nation’s 10-year government securities gained five basis points, or 0.05 percentage point, to 1.68 percent. They reached the lowest level since at least 1950, 1.615 percent, on June 1 as investors sought refuge in top-rated sovereign debt.

Bank of Canada Governor Mark Carney will lower borrowing costs by the end of the year for the first time since 2009 as investors increase odds that the central bank will have to react to the prospect of a worsening global economy, swap prices show.

BOC Easing

Investors are pricing in as many as 34 basis points of central-bank easing by December. There’s an 81 percent chance of at least one quarter-percentage point cut this year, according to Bloomberg calculations on overnight index swaps.

Investors will be parsing tomorrow’s statement to discern whether Carney has shifted his bias toward easing after telling lawmakers on April 24 interest-rate rises may be necessary to contain inflation. Policy makers have kept the benchmark rate steady for the longest unchanged period since the 1950s.

“The market is expecting a substantial change in tone from previous hawkish announcements,” said Blake Jespersen, director of foreign exchange at Bank of Montreal (BMO) in Toronto. “There’s a good chance we test C$105, even as early as tomorrow, if the statement is as dovish as people expect.”

‘Weaken Off’

Canada’s economic growth rate stagnated in the January-March period as business investment rose while consumer spending increased at the slowest pace in three years. Gross domestic product grew at a 1.9 percent annualized pace in the first quarter, matching the revised rate of the prior three months, Ottawa-based Statistics Canada said June 1.

“If it sounds like the international concern is all encompassing, then expect the Canadian dollar to weaken off with all other risk-on products,” said Firas Askari, head currency trader at Bank of Montreal in Toronto.

Orders to U.S. factories unexpectedly fell in April for a second month, pointing to a deceleration in manufacturing as the global economy cools. Bookings dropped 0.6 percent after a revised 2.1 percent decrease in March, the first back-to-back declines in more than three years, figures from the Commerce Department showed today in Washington. Economists projected a 0.2 percent gain, according to the median forecast in a Bloomberg News survey.

“The tone of the communique is likely to be more cautious than in April,” Charles St-Arnaud, an economist with Nomura Securities International Inc. in New York, wrote in a note to clients. Policy makers are likely to highlight increasing “uncertainty surrounding the global outlook,” he wrote, and that the central bank will indicate “willingness to stay on hold for some time.”

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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