Canada Dollar Falls Most in 4 Months on Rate-Bias Tilt, Oil Drop

The Canadian dollar fell the most since June after the Bank of Canada abandoned a leaning toward higher rates and crude oil dropped below $100 a barrel for the first time since July.

The currency weakened versus the majority of its 16 most-traded peers for a fourth week as a more accommodative policy by the Bank of Canada announced Oct. 23 followed a Sept. 18 decision by the Federal Reserve to sustain the pace of bond purchases to engineer a stronger economic recovery. Canada’s economy may have expanded 1.7 percent in August from a year earlier, according to the median in the Bloomberg News survey of economists before the Oct. 31 Statistics Canada report.

“There’s two factors at work, the Bank of Canada and industrial commodity prices,” Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, said by phone from New York. “We haven’t seen oil prices this low in a long time.”

The loonie, as Canada’s dollar is known for the image of the waterfowl on the C$1 coin, added 1.6 percent this week to C$1.0448 per U.S. dollar in Toronto. It reached C$1.0461, the weakest level since Sept. 6. One loonie buys 95.71 U.S. cents.

BMO’s three-month forecast is for the currency to weaken to C$1.06, Anderson said.

Bond Rally

Canada’s benchmark 10-year government bond rose, pushing the yield down 11 basis points, or 0.11 percentage points, to 2.42 percent, the lowest level since July 23. The 1.5 percent security maturing in June 2023 added 91 cents to C$92.19.

The Bank of Canada will announce additional details on Oct. 31 for a five-year note sale scheduled for Nov. 6.

Crude oil futures fell 2.9 percent to $97.92 a barrel in New York, while Canadian heavy crude ended the week 10.2 percent lower at $64.95 a barrel, the biggest loss since December 2012. The discount faced by benchmark crude Western Canada Select, to West Texas Intermediate, ended the week at $33 per barrel, almost the biggest gap in three weeks, according to data compiled by Bloomberg.

“The environment leaves the Canadian dollar exposed,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said in a research report. “Oil market dynamics remain unsupportive and the risks for the currency on this front are skewed to the downside.”

Official Forecasts

The Bank of Canada pared its economic growth forecast for this year to 1.6 percent from 1.8 percent. The central bank also said 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.”

“We’ll have to take a look at key inflation numbers as well as monthly growth next week,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “If we see renewed fragility in those numbers they would justify the Bank of Canada’s more neutral stance and spur talk the next move could be a rate cut.”

The BOC decision to adopt a neutral bias and relinquish calls for tighter policy will delay the next rate rise by three months, according to 15 economists in a Bloomberg News survey conducted Oct. 23-24. The median estimate targets a rate rise in the first quarter of 2015, compared with a consensus for fourth quarter in an Oct. 4-9 survey.

Hedge funds and other large speculators reduced bets the Canadian dollar will fall against its U.S. peer in the week ended Oct. 1, according to figures from the Washington-based Commodity Futures Trading Commission showed. The report was delayed by the 16-day partial shutdown of the U.S. government.

The difference in the number of wagers by on a decline in the loonie versus those on a gain -- so-called net shorts --was 955, the least since February and compared with 5,675 a week earlier.

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

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

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

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