Canadian Dollar Gains From Lowest in 3 Years on Fed Rate Outlook

The Canadian dollar rose from the lowest in three years on bets the Federal Reserve will keep interest rates low longer than forecast while it slows the pace of its stimulative asset purchases.

The currency advanced against all of its major peers as crude oil, the nation’s largest export, climbed to a two-month high. It gained against its U.S. counterpart for the first time in four days before a report tomorrow forecast to show Canadian inflation in November remained at the bottom end of the central bank’s target band. The Fed said yesterday it will cut its $85 billion of monthly bond purchases by $10 billion even as it extended the time line for almost-zero interest rates.

The Canadian dollar’s advance “is just a correction to the knee-jerk reaction of yesterday,” said Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, by phone from Toronto. “The direction of dollar/Canada is stronger dollar, weaker Canada. I think we’re not going to be cutting rates here -- it looks like the Bank of Canada would prefer we weaken the currency, and so I think that’s what the market is going to set out it to do.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.4 percent to C$1.0664 per U.S. dollar at 5 p.m. Earlier it touched C$1.0728, the lowest since May 2010. One loonie buys 93.77 U.S. cents.

Futures of crude oil rose 1 percent to $98.77 per barrel in New York after touching $99.17, the highest since Oct. 22.

‘Gradual Grind’

The Fed reinforced its assurances that interest-rate increases are far off by saying yesterday its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” its 2 percent target.

Ben S. Bernanke, after his final meeting as Fed chairman, said the bank’s actions were “intended to keep the level of accommodation the same overall and to push the economy forward.”

“They still want a high degree of stimulus, it’s just that how they’re getting that to the market is going to change from asset purchases to now more explicit forward guidance,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc. “We should see the Canadian dollar strengthening from the levels below C$1.07 going forward, until we get that clarity on the Federal Reserve.”

Risk Reversals

The cost to insure against further declines in the loonie versus its U.S. peer fell to almost the lowest in more than eight months, with the three-month 25-delta risk-reversal rate dropping to 1.01 percent on a closing basis. On Dec. 11 it closed at 0.99 percent, the lowest since April. The average this year is 1.26 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Canada’s benchmark 10-year government bond fell, with yields rising two basis points, or 0.02 percentage point, to 2.70 percent. The 1.5 percent security maturing in June 2023 lost 17 cents to C$90.06.

The extra interest available in U.S. government 10-year bonds compared with their Canadian peers, a gauge of longer-term growth expectations, increased to 23 basis points, the biggest U.S. advantage since February 2011.

Inflation Watch

Canadian consumer prices rose 1 percent in November from a year earlier, topping the 0.7 percent increase in October, 21 economists in a Bloomberg survey forecast before the government issues the data tomorrow.

Bank of Canada Governor Stephen Poloz has cited the risk of low inflation as a reason why he surprised investors by dropping the bank’s bias to raise interest rates earlier this year. The central bank’s target band is 1 percent to 3 percent.

Exports and investment have been disappointing and inflation has been “lower than we can explain,” Poloz said in an interview with Bloomberg News Dec. 17. The Bank of Canada’s forecast is that the economy won’t reach full output until around the end of 2015.

“The nearer-term story is probably still one of a gradual grind toward the downside, in terms of CAD performance,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, said by phone from London. “It’s all about leader and laggard. And if you think the U.S. is going to be a leader in terms of having growth earlier, that provides a better fundamental U.S. bias, at least in the short term.”

The Canadian dollar was the top performer today among the 10 currencies tracked by the Bloomberg Correlation-Weighted Index, advancing 0.6 percent. The U.S. dollar added 0.2 percent, while the New Zealand dollar dropped the most, 0.6 percent.

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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