Canada Dollar Trades at Almost Weakest in 3 Years on Fed Wagers

The Canadian dollar traded at almost the weakest level in three years amid speculation Federal Reserve policy makers will decide at a two-day policy meeting to reduce their monthly bond-buying program.

The currency dropped for a second day against its U.S. peer even as Canadian factory sales unexpectedly increased in October. Canada’s currency closed at C$1.0684 on Dec. 4, the lowest since May 2010, after the Bank of Canada left interest rates unchanged and warned of low inflation. The Federal Open Market Committee signaled in October it may taper its stimulus program “in coming months” if the economy improves as anticipated.

“People are just trying to reduce risk ahead of the FOMC tomorrow,” Greg Anderson, global head of FX strategy at Bank of Montreal’s BMO Capital Markets, said by phone from New York. “If the Fed does taper, certainly dollar-CAD will go to C$107. People don’t want to be short dollar-CAD.” A short is a wager an asset will decline in value.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, declined 0.1 percent to C$1.0607 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 94.28 U.S. cents.

Futures of crude oil, Canada’s largest export, fell 0.2 percent to $97.33 per barrel in New York. The discount Canadian oil producers face for their crude compared to U.S. benchmarks fell to $25.75, the smallest since Sept. 12, according to data compiled by Bloomberg.

‘Economic Fundamentals’

Canada’s government bonds rose, with the benchmark 10-year security’s yield dropping four basis points, or 0.04 percentage point, to 2.64 percent. The 1.5 percent securities maturing in June 2023 added 28 cents to C$90.54.

Canadian manufacturing sales to increased 1 percent to C$50.1 billion ($47.3 billion), Statistics Canada said in Ottawa. A Bloomberg survey of economists forecast a 0.3 percent decline.

Manufacturing sales “were a bit stronger, which is positive for GDP overall, and positive for economic fundamentals,” Camilla Sutton, the Toronto-based head of currency strategy at Bank of Nova Scotia, said in a phone interview.

Interest Rates

Bank of Canada Governor Stephen Poloz said last week he’s weighing the risk of a housing-market correction against the threat of deflation. Inflation in the world’s 11th largest economy has slowed to 0.7 percent, below the 1 percent to 3 percent target band, and the bank said Dec. 4 that “downside risks to inflation appear to be greater” than before.

The bank’s key interest rate has been at 1 percent since September 2010 and will probably remain there through next year, according to a Bloomberg survey of economists.

Canadian consumer prices rose 1 percent in November from a year earlier, topping the 0.7 percent increase in October, economists in a Bloomberg survey forecast before the government issues the data on Dec. 20.

“Canadian officials will continue to do all they can to weaken the Canadian dollar in the next quarter,” said BMO’s Anderson. “Through verbal intervention or through an easing bias.” The bank’s forecast is for the loonie to weaken to C$108-to-C$109 per U.S. dollar by end of first quarter 2014.

While 34 percent of economists surveyed by Bloomberg forecast the Fed will reduce its $85 billion in monthly bond purchases at the meeting that ends tomorrow, futures traders bet it will keep interest rates at almost zero at least until the end of 2014.

Traders see an 89 percent chance that the U.S. central bank will keep the federal-funds rate target at zero to 0.25 percent through next year, according to data on futures compiled by Bloomberg.

The loonie has dropped 3.8 percent this year against the 9 developed-nation currencies in the Bloomberg Correlation-Weighted Indexes, while the U.S. dollar has added 3.6 percent. The yen leads decliners, with a plunge of 14 percent, and the euro’s 8.6 percent advance leads gainers.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; 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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