The Canadian dollar had the biggest two-day slump in four months after the central bank dropped language about the need for future interest-rate rises that had been in place for more than a year, as risks of a worsening economy increased.
The currency reached a six-week low against its U.S. counterpart after the Bank of Canada said yesterday inflation will remain less than its 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.” Crude oil, the nation’s largest export, touched the lowest level since June.
“The shift in monetary policy is a driver,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto. “The U.S. outlook is looking much more positive than Canada’s. That should lead to weakness in the Canadian dollar.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.4 percent to C$1.0422 per U.S. dollar at 5 p.m. in Toronto. It dropped as much as 1.5 percent during the past two days and reaching the weakest since Sept. 9. One loonie buys 95.95 U.S. cents.
A closing level weaker than C$1.0420 would pave the way for additional declines in the currency to C$1.0516 as the central bank’s statement led to a bearish breakout above trend-line resistance at C$1.0368, George Davis, chief technical analyst for fixed-income and currency strategy in Toronto at Royal Bank of Canada, said in a note to clients today.
The currency is 10.3 percent above its fair value, based on Economist Group’s Big Mac Index. The gauge compares local prices of McDonald’s Corp.’s signature hamburger in different countries to judge a currency’s valuation.
“We’ve got a broadly weak dollar trend and the Canadian dollar is actually underperforming under that trend,” Chris Turner, head of currency strategy at ING Groep NV in London, said in a phone interview. “The currency is overvalued and they’re more concerned about exports.”
Canada’s benchmark 10-year government bonds rose, with yields falling one basis point, or 0.01 percentage point, to 2.42 percent. The 1.5 percent security maturing in June 2023 added six cents to C$92.14.
Futures of crude oil was little changed at $97.18 per barrel in New York, and touched the least since June 27. The discount Canada’s benchmark crude oil-grade, Western Canada Select, faced to West Texas Intermediate, its U.S. peer, was at $33.50 per barrel, the most on a closing basis since Oct. 4.
The central 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.
“Those risks are balanced as we sit here,” Bank of Canada Governor Stephen Poloz said yesterday, 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.”
The Canadian dollar has fallen 3.9 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar is down 6.9 percent, and the U.S. dollar has added 1.5 percent.
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