Canadian Dollar Drops Most in Four Months on BOC Rate-Bias Shift

The Canadian dollar lost the most since June after the Bank of Canada dropped language about the need for future interest-rate increases that has been in place for more than a year, citing greater slack in the economy.

The currency fell against the majority of its 16 most-traded peers as Governor Stephen Poloz maintained the benchmark rate on overnight loans between commercial banks at 1 percent for the 25th consecutive meeting, as forecast by all 23 economists in a Bloomberg News survey. Inflation (CACPI) will remain less than the 2 percent target until the end of 2015, two quarters longer than forecast in July, with the risks of further weakness taking on “increasing importance,” the bank said.

“We’ll be lucky to see dollar/CAD stick to current levels in a three to six month time frame,” said Geoffrey Yu, a senior foreign-exchange strategist at UBS AG, by phone from London. “Unless data begins to register blowout numbers, like 3 percent inflation for three straight months, it’s really hard to see Bank of Canada changing their tack anytime soon.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.9 percent to C$1.0382 per U.S. dollar at 5 p.m. in Toronto. It dropped to as low as C$1.0397, or 1.1 percent, the biggest drop since June 20. One loonie buys 96.32 U.S. cents.

The currency traded weaker than its 50-, 100-, and 200-day moving averages for the first time since Oct. 16.

“Those risks are balanced as we sit here,” Poloz said when asked if Canadian interest rate rises or cuts were equally likely. “Policy is dependent on the data flow and how it impacts our outlook for inflation.”

Bonds Rally

Canada’s benchmark 10-year government bonds rose, with yields falling five basis points, or 0.05 percentage point, to 2.43 percent, touching the lowest since July 23. The 1.5 percent security maturing in June 2023 added 40 cents to C$92.06.

Poloz’s predecessor Mark Carney inserted the so-called tightening bias last year to curb mounting household debts, which he called the greatest danger to the Canadian economy.

“Poloz decided to roll the dice a little bit,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “I thought they’d continue to leave in place that the next move would eventually be a rate hike, but this time they’ve said, ’look, we acknowledge the risks in the household sector, but inflation is too low and our outlook is not panning out the way we anticipated.”

The bank’s economic growth forecast for this year was cut to 1.6 percent from 1.8 percent. The outlook for 2014 was lowered to 2.3 percent from 2.7 percent and the 2015 projection trimmed to 2.6 percent from 2.7 percent.

Policy Update

“Finally, the Bank of Canada is catching up with reality, Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc., said by phone from New York. ‘‘The new growth forecasts brings them in line with what the International Monetary Fund had in October. A correction in the Canadian dollar was needed, and this will help get us there.’’

Futures of crude oil, Canada’s largest export, fell 0.7 percent to $97.14 per barrel, reaching the lowest level since July 1. The discount Canadian oil producers face compared to prices for the U.S. benchmark was $31.75, the most in two weeks.

The Canadian dollar has fallen 3.5 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar is down 6.8 percent, and the U.S. dollar has added 1.5 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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