The Canadian dollar fell as Bank of Canada Governor Stephen Poloz said the nation’s economy has significant slack and inflation remains muted, pushing back the potential for an interest-rate increase.
The currency weakened against the majority of its 16 most-traded peers as policy makers kept Canada’s benchmark rate on overnight loans at 1 percent for the 23rd consecutive announcement, as forecast by all 20 economists in a Bloomberg News survey. Poloz tied higher rates to barometers of economic health and said tighter policy can be expected “over time,” retaining the bias that has been included in every policy statement since April 17, 2012. Federal Reserve Chairman Ben S. Bernanke said curtailing the U.S. central bank’s asset purchases remains linked to indications of economic improvement.
Poloz “gave you a Fed-esque type statement that essentially said ’we’re data dependent,’” said Adrian Miller, the director of fixed-income strategies at GMP Securities LLC, by phone from New York. “For the Canadian market, it injects a higher level of uncertainty and volatility.”
The loonie, as the Canadian dollar is known, fell 0.4 percent to C$1.0405 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 96.11 U.S. cents.
Canada’s 10-year benchmark government bonds rose, pushing the yield down four basis points, or 0.04 percentage point, to 2.37 percent, after touching the lowest level since June 21. The 1.5 percent security maturing in June 2023 added 31 cents to C$92.41.
The Bank of Canada will provide additional details tomorrow about a two-year debt sale scheduled for July 24.
In his first rate decision since taking office June 3, Poloz indicated he will extend a pause in interest rates since September 2010 until he sees more durable signs of an economic recovery. “As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate,” according to the statement.
JPMorgan Chase & Co. pushed back its forecast for a policy rate increase by three months to the fourth quarter of 2014, citing “nuanced” wording changes “that appear to be slightly more dovish than previously,” senior economist Sandy Batten said in an e-mail.
Poloz is counting on exports and business investment to accelerate growth in the world’s 11th-largest economy through 2015 with consumers weighed down by near-record debts.
“He is a more dovish Bank of Canada governor and more realistic, given the state of the Canadian economy,” Eimear Daly, a currency-market analyst at Monex Europe Ltd., said by phone from London, “When he was talking about normalization of policy he was saying that it will happen over a long time.”
Monex forecast the currency will reach C$1.03 by end of September and C$1.06 by year-end.
The Bank of Canada raised its economic growth forecast for this year to 1.8 percent from an April prediction of 1.5 percent, while lowering the 2014 projection to 2.7 percent from 2.8 percent. Both figures exceed Bloomberg consensus forecasts of 1.7 percent and 2.4 percent.
The Fed chairman’s congressional testimony highlighted the Federal Open Market Committee’s desire to assure that the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases. An increase in borrowing costs since the chairman first started discussing tapering purchases threatens to slow the four-year expansion.
Foreign investors bought Canadian securities at a reduced pace in May from a month earlier as they sold government bonds and curbed demand for stocks and company debt.
Purchases totaled C$6.74 billion ($6.49 billion) during the month, from C$14.91 billion in April, Statistics Canada said today in Ottawa. Purchases of money market instruments and bonds fell to C$5.54 billion, from C$12.75 billion the previous month, as non-resident investors sold C$3.50 billion of federal and provincial bonds.
The loonie has gained 0.8 percent in the past three months against nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The euro led gainers with a 3 percent jump followed by the U.S. dollar’s 2.4 percent increase.
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