Canadian Dollar Falls to 2-Month Low on Bets Fed to Trim Easing

Canada’s dollar fell to a more than two-month low against its U.S. counterpart amid speculation growth in the world’s largest economy would spur the Federal Reserve to reduce stimulus, known as quantitative easing.

The currency declined against the majority of its 16 most-traded peers as crude oil, Canada’s biggest export, snapped a four-day rally. It pared losses versus the greenback after one Fed regional bank president said the central bank should continue its bond-buying program while another said he was undecided on the Fed’s next move. Fed Chairman Ben S. Bernanke will discuss policy in congressional testimony tomorrow before the central bank releases minutes of its last meeting.

“The market seems to be preparing for some discussion about the end of QE, which will give the dollar more strength and should weigh on the Canadian dollar,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto. “The Canadian economy is still struggling. Inflation numbers have suggested that there is no reason for the Bank of Canada to consider hiking rates.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to C$1.0267 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0321, weakest since March 7. One loonie buys 97.40 U.S. cents.

Oil, Stocks

Crude-oil futures fell 0.6 percent to $96.16 a barrel in New York. The Standard & Poor’s 500 Index of stocks rose 0.2 percent.

Canada’s benchmark 10-year government bonds rose, with yields falling one basis point, or 0.01 percentage point, to 1.91 percent. The 1.5 percent note maturing in June 2023 added 10 cents to C$96.30.

The loonie trimmed its decline after Fed Bank of St. Louis President James Bullard, who votes on the policy-setting Federal Open Market Committee this year, said the panel should continue the quantitative-easing program while “adjusting the rate of purchases appropriately in view of incoming data on both real economic performance and inflation,” according to the text of remarks prepared for delivery in Frankfurt.

William C. Dudley, the Fed Bank of New York president and vice chairman of the FOMC, said in prepared remarks for a speech in New York that “because the outlook is uncertain, I cannot be sure which way -- up or down -- the next change will be.”

As the Fed debates its next move, the highest inflation-adjusted yields on Canadian government bonds in almost three months suggest that incoming Bank of Canada Governor Stephen Poloz has room to reverse Mark Carney’s tightening bias and cut interest rates.

‘Hiking Bias’

The difference between the return of the benchmark 10-year bond and the annual rate of inflation, known as the real yield, widened to 152 basis points on May 17, after Statistics Canada said consumer prices fell to 0.4 percent in April. That’s above the average of 114 basis points since before the start of the global financial crisis in 2008.

“After the recent decline in inflation, there are still question marks on if the central bank can or will maintain its hiking bias,” Mark Chandler, head of fixed-income strategy at Royal Bank of Canada (RY)’s RBC Capital Markets unit, said by phone from Toronto. “Performance from here will be dictated by if the Canadian economy can hook on to the coattails of the emerging U.S. economy.”

While its currency appreciates and its central bank maintains the only bias toward higher rates in the Group of Seven, Canada’s economy is growing at the slowest rate of developed nations outside of Europe.

Overvalued Loonie

Doug Porter, chief economist at the Bank of Montreal, said the Canadian dollar is overvalued by 5 percent to 10 percent given levels of commodity prices.

Porter, speaking in an interview today at Bloomberg’s Canada Economic Summit in Toronto, said the Canadian dollar will continue to be supported by safe-haven flows in the next couple of years, keeping it trading near parity with the U.S. dollar before weakening in the “medium-term.”

There is also no urgency for the Bank of Canada to raise interest rates, Porter said, adding there is a case for the country’s central bank to drop its tightening bias because the housing market has cooled.

Steady Rate

The Bank of Canada has held its overnight rate at 1 percent since September 2010, where it is forecast to remain through the rest of the year by 22 economists surveyed by Bloomberg.

The central bank last month forecast inflation would stay below its 2 percent target until the second quarter of 2015, longer than the previous estimate for the third quarter of next year. At the same time, it cut its growth outlook for this year to 1.5 percent from 2 percent because of lower business investment and government spending.

Canada’s annual inflation rate fell in April to its slowest in more than three years, taking it below the central bank’s target band and adding to evidence of growing slack in the world’s 11th largest economy. The consumer price index (SPX) rose 0.4 percent in April from a year ago compared with a 1 percent annual gain the prior month, Statistics Canada said May 17.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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

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