Canada’s dollar weakened the most in a month as slowing inflation and a statement from Bank of Canada Governor Stephen Poloz raised the possibility the central bank might reduce interest rates.
The currency fell versus 13 of its 16 most-traded peers this week after Poloz said the economy still needs stimulus, reiterating comments he made last month when he unexpectedly scrapped policy language showing a bias for a higher rate. Inflation last month was below the bank’s goal, while the U.S. Federal Reserve signaled it may cut its stimulus soon. Canadian growth slowed in September for a second month, a report next week is forecast to say.
“There is some two-sided risk to the shift in the bias statement, that conceivably it could be to an easing bias,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by phone from Toronto. The Bank of Canada could start to “talk about the possibility that if inflation stays low, they could adopt an easing bias.”
The loonie, as the Canadian dollar is called because of the image of the waterfowl on the C$1 coin, fell 0.7 percent, the most since the five days ended Oct. 25, to C$1.0514 per U.S. dollar this week in Toronto. It touched C$1.0569 yesterday, the weakest since July 9. One loonie purchases 95.11 U.S. cents.
Canadian government bonds maturing in 10 years and longer fell, pushing yields on benchmark 10-year securities up one basis point, or 0.01 percentage point, to 2.57 percent. The 1.5 percent debt maturing in June 2023 lost 8 cents to C$91.01.
Implied volatility for one-month options on the U.S. dollar against its Canadian peer climbed to the highest level in more than seven weeks. It reached 6.43 percent, the most since Sept. 30. The measure is used to set option prices and gauge the expected pace of currency swings. The average this year is 6.67 percent.
The loonie weakened as data yesterday showed the Canadian consumer price index rose 0.7 percent in October from a year earlier, lagging behind a Bloomberg survey’s forecast for a 0.8 percent inflation rate. It was 1.1 percent in September. The central bank’s target is 1 percent to 3 percent.
“You’re always interested in CPI, given that it’s the most direct impact on central-bank policy,” Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce, said Nov. 21 by telephone from Toronto. “Certainly a 0.8 or 0.9 is bottom-end and normally the time when banks start to ease conditions.”
Bank of Canada Governor Stephen Poloz told the Senate banking committee in Ottawa on Nov. 20 that the central bank’s current policy remains appropriate.
Poloz said last month the risk of inflation falling below policy makers’ target band led him to signal on Oct. 23 the next move in interest rates wouldn’t necessarily be higher. He dropped language about the need for higher rates that had been in every policy statement for more than a year.
The central bank has kept its benchmark rate at 1 percent since 2010 to support the economy.
Canada’s gross domestic product grew 0.2 percent in September, economists in a Bloomberg survey forecast before the nation’s statistics agency reports the data on Nov. 29. It gained 0.3 percent the previous month following a 0.6 percent increase in July, the most in two years.
Minutes of the U.S. central bank’s last meeting, on Oct. 29-30, showed policy makers said they might reduce the stimulus that has fueled global risk appetite “in coming months” if the economy improves as anticipated. The U.S. is Canada’s biggest trade partner.
The Fed, which meets next Dec. 16-17, purchases $85 billion of bonds each month to push down long-term yields and spur economic growth.
The loonie pared a drop to a four-month low against the greenback yesterday as Statistics Canada reported that retail sales increased 1 percent to a record C$40.7 billion ($38.6 billion). The gain exceeded the forecasts of all 19 economists in a Bloomberg survey that projected a 0.3 percent increase.
The currency of Australia, like Canada a commodity exporter, fell to the lowest level against the U.S. dollar in almost three months yesterday after Reserve Bank of Australia Governor Glenn Stevens said he was “open-minded” about intervention to prevent the Aussie dollar from gaining.
“It’s maybe just emblematic of central banks of commodity-producing countries who are not happy with the level of their currency,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit, said by phone from Toronto. “Australia was quite vocal about it, and maybe some in the market are extrapolating those sentiments to the Canadian economy and by association the Canadian dollar.”
The loonie has dropped 2.8 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar has fallen 9.7 percent, while the U.S. dollar has gained 3.7 percent.
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