Canadian Dollar Halts Three-Day Loss as Focus Shifts Fed Policy

The Canadian dollar halted a three-day slide on speculation the currency had declined too far too fast as investors bet the Federal Reserve will maintain monetary stimulus that may devalue the U.S. dollar.

The currency fell the most last week since June after the Bank of Canada dropped a bias toward higher interest rates it had included in every policy statement for more than a year, even as it held the benchmark rate at 1 percent. The Fed, which starts a two-day policy meeting tomorrow, is unlikely to begin tapering the bond-buying program its used to lower interest rates and stimulate the economy, according to the median estimate of a Bloomberg economist survey.

“After that pretty harsh selloff we saw last week after the Bank of Canada rate announcement, I think what’s happening now is we’re just seeing a consolidative pattern here where traders are assessing the message the Bank of Canada put forward,” said Scott Smith, senior market analyst at Cambridge Mercantile Group, a global foreign exchange and payments provider, by phone from Calgary.

The loonie, as the Canadian dollar is known for the image of the water fowl on the C$1 coin, was little changed at C$1.0445 per U.S. dollar at 5 p.m. One loonie buys 95.74 cents.

Canada’s benchmark 10-year government bond was little changed, yielding 2.43 percent at a price of C$92.11.

Futures for crude oil, Canada’s largest export, rose 0.7 percent to $98.51 per barrel and the Standard & Poor’s 500 Index of U.S. stocks rose 0.1 percent.

Repricing Risk

“The Canadian dollar is really just consolidating its losses right now,” said Eimear Daly, a currency market analyst at Monex Europe Ltd., by phone from London. “We’re really going to see markets reprice the risk there could actually be tapering in the U.S.”

Daly said there is no chance of tapering at the rate announcement Oct. 30, though she expects stronger data in coming months to boost bets for earlier tapering.

The Fed will begin reducing its $85 billion in monthly bond purchases in March, according to the median estimate of a Bloomberg survey of 35 economists conducted Oct. 17-18.

Factory production in the U.S. rose less than forecast in September, indicating a pause in manufacturing leading into the budget battle that partially closed the federal government.

Output at factories rose 0.1 percent after a revised 0.5 percent gain in August that was smaller than initially U.S estimated, figures from the Fed showed today. The median forecast of economists in a Bloomberg survey called for a 0.3 percent September gain.

Canadian Growth

A 16-day U.S. government shutdown earlier this month shaved 0.6 percent from annualized fourth-quarter growth, according to Standard & Poor’s.

‘It’s halted the slide for now,” said Brad Schruder, director of foreign exchange at Bank of Montreal, by phone from Toronto. “The market is looking at what’s been happening in the U.S. and they’re not confident a strong-dollar policy, or a basis for a strong-dollar environment, is there as long as the Fed is going through all these challenges.”

A report Oct. 31 may show economic growth in Canada slowed to 0.1 percent in August from 0.6 percent the previous month, according to the median estimate of a Bloomberg survey of 18 economists.

The Canadian dollar will end the year at C$1.04 per U.S. dollar according to the median estimate of 62 economists in a Bloomberg survey.

The Canadian dollar is the biggest loser in the past three months among nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The loonie has dropped 4.3 percent, compared to the U.S. dollar’s 2.5 percent fall and a 1.8 percent increase for the Australian dollar.

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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