Canada Dollar Declines on Concern U.S. Adds to Economic Slowing

Oct. 19 (Bloomberg) -- The Canadian dollar fell versus most of its 16 major peers for a third week, the longest streak since June, on concern the 16-day U.S. government shutdown added to economic headwinds for the country’s largest trading partner.

The currency rose against the U.S. dollar on speculation the 16-day closure may lead the Federal Reserve to delay tapering its bond-buying program. A government report yesterday showed inflation remained at the low end of the Bank of Canada’s target band. The central bank is forecast to retain its 1 benchmark interest rate target at a policy meeting Oct. 23.

“With inflation so low and uncertainty in the U.S. economy, the economic metrics are just not showing enough growth for the Bank of Canada to start normalizing policy,” Jack Spitz, managing director of foreign exchange in Toronto at National Bank of Canada, said in a telephone interview. “Until we see better economic releases domestically and the central bank takes a more hawkish approach any potential for the loonie is to gain ground is remote.”

The loonie, as Canada’s dollar is known for the image of the waterfowl on the C$1 coin, added 0.6 percent this week to C$1.0286 per U.S. dollar in Toronto. One loonie buys 97.22 U.S. cents. It last weakened against a majority of its 16 most-traded peers during the three weeks ended June 28.

Price Swings

Implied volatility for one-month options on Canada’s dollar versus its U.S. counterpart reached 5.3 percent, the least since May. The measure is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.6 percent.

The nation’s benchmark 10-year government bonds rose, with yields down six basis points, or 0.06 percentage point, to 2.53 percent, reaching the lowest level since Aug. 12. The 1.5 percent securities maturing in June 2023 added 52 cents to C$91.28.

Options traders assign no probability for the central bank to raise its benchmark interest rate at its Oct. 23 policy meeting, pricing in 0.2 basis points looser policy, according to Bloomberg calculations based on overnight index swaps.

Canadian consumer prices advanced at a 1.1 percent pace for a second month in September on gains in shelter and food costs, Statistics Canada reported yesterday in Ottawa.

Price Levels

The core rate, which excludes eight volatile products, also matched August’s pace at 1.3 percent. Economists surveyed by Bloomberg forecast total inflation of 1.0 percent and core inflation of 1.4 percent.

Bank of Canada Governor Stephen Poloz said last week that growth has “disappointed” and the economy is operating below the level the central bank expected six months ago. The bank predicted in July that inflation will stay below its 2 percent target until the second quarter of 2015.

“September’s slightly weaker-than-expected core inflation reading is consistent with the increase in economic slack over the past year,” David Madani, an economist at Capital Economics Ltd. wrote in a note to clients. “With the Bank of Canada’s export-led recovery hopes likely to face even more delays, we expect underlying inflation to remain muted over the remainder of this year.”

Canadian investors are withdrawing the most cash from domestic fixed-income funds in three years, joining foreign counterparts exiting the country’s bond markets as rising interest rates cut returns.

Capital Flows

Investors withdrew C$1.38 billion ($1.34 billion) from Canadian government and investment-grade funds in September, according to data from the Investment Funds Institute of Canada. The withdrawals were the largest since the mutual-fund group started keeping current records in May 2010. Statistics Canada said Oct. 17 that foreigners sold C$1.22 billion of Canadian government debt in August, while buying a net C$2.03 billion of the nation’s corporate bonds.

The standoff over U.S. fiscal policy that shut the government “encouraged our enemies” and slowed economic growth, President Barack Obama said on Oct. 17. Speaking at the White House after federal agencies opened for the first time since Oct. 1, Obama said the U.S. suffers because of repeated fiscal brinkmanship.

Canada and the European Union reached an “agreement in principle” on a free-trade treaty that brings near an end more than four years of negotiations. Canadian Prime Minister Stephen Harper and European Commission President Jose Barroso announced the agreement yesterday following a meeting in Brussels.

Trade Support

The pact, which would need the approval of EU national governments and the European Parliament, will eliminate about 98 percent of all Canadian and EU tariff lines on the first day of its implementation.

The Canadian dollar has fallen 2.5 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar is down 6.2 percent, and the U.S. dollar has added 1.5 percent.

The loonie will weaken C$1.04 by the end of the year, according to the median estimate in a Bloomberg News survey of analysts.

“The economic landscape in the U.S and Canada is fraught with uncertainty, and the same concerns about growth in the U.S. have tainted the Canadian outlook,” said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto. “Inflation data continues to come in on the soft side, which gives the Bank of Canada cover to be more dovish.”

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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