The Canadian dollar approached its weakest point in eight months against its U.S. counterpart after the Bank of Canada indicated it won’t raise interest rates anytime soon with inflation slowing more than expected.
The currency declined as central-bank Governor Mark Carney softened language about tighter policy for the second meeting in a row, saying inflation will “remain low in the near term” in an economy with “material excess capacity.” Carney retained the warning rates will rise over time amid speculation it would be dropped entirely. The central bank kept its benchmark rate at 1 percent.
“After the Bank of Canada seemed to push out interest rate hikes further into the future, and took one more step towards a neutral as opposed to a hawkish stance, that weighed on the Canadian dollar,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS), said by phone from Toronto. “It’s most likely to weaken, just kind of drift lower, as the market digests what’s occurred over the last month.”
The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.5 percent to C$1.0320 per U.S. dollar at 5 p.m. in Toronto after earlier declining 0.7 percent. It touched C$1.0342 on March 1, the weakest since June 28. One Canadian dollar buys 96.90 U.S. cents.
Carney has warned in every policy decision since April that rates could rise, today reiterating that his eventual next move will probably be an increase. That makes him the lone Group of Seven central banker who has indicated he might raise interest rates, while the U.S. Federal Reserve and Bank of England are buying bonds to hold down yields to boost growth with policy rates close to zero.
“The considerable monetary-policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” policy makers led by Carney, 47, said in a statement from Ottawa today.
Canada’s benchmark 10-year government bond fell, with yields rising three basis points, or 0.3 percentage point, to 1.85 percent. The 2.75 percent security maturing in June 2022 fell 29 cents to C$107.65.
The shifting guidance on rate increases has sparked a squeeze in the supply of shorter dated bonds, forcing the central bank to make the longest string of loans from its own inventory since the onset of the financial crisis.
The Bank of Canada has loaned securities on 10 of the last 11 days to ease the shortage as demand from traders unwinding bets on a rate increase this year pushed rates for repurchase agreements on two- and five-year government securities to almost zero.
Speculation the Bank of Canada would drop its bias to raise rates prompted hedge fund to amass record bets against the Canadian dollar, data from the U.S. Commodity Futures Trading Commission show.
Futures contracts wagering on a decline in the Canadian dollar versus its U.S. counterpart held by so-called leveraged funds totaled C$6.3 billion ($6.1 billion) in the week ended Feb. 26, according to Citigroup Inc., citing CFTC data.
“There is still the slightest bias toward higher rates, but it’s a microscopic bias,” Adam Button, currency analyst at Forexlive.com in Montreal, said by phone. “There is no reason to expect a rate hike this year. A rate hike in 2013 is extraordinarily unlikely.”
The government statistics agency publishes February employment data on March 8, with economists predicting the jobless rate will rise to 7.1 percent from 7 percent.
GDP grew at a 0.6 percent annualized pace from October to December, the slowest since the second quarter of 2011 and less than Carney’s Jan. 24 projection of a 1 percent expansion rate. Signs that the world’s 11th-largest economy is struggling to reach full output led Carney to say that an increase in his benchmark rate is “less imminent.”
The GDP report came after economic data on housing starts, employment growth, factory sales, inflation and retail sales all fell short of economists’ median forecasts this year.
“We should see some of the data begin to turn a little more positively,” David Tulk, chief macro strategist at Toronto-Dominon Bank’s TD Securities unit, said by phone from Toronto. “The Canadian dollar could move a little bit higher if we start to see that run in the data.”
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