Bank of Canada Governor Stephen Poloz is giving investors the green light to push the nation’s currency, the worst-performing major exchange rate over one- and six-month periods, even lower.
The Canadian dollar weakened to the lowest in 4 1/2 years against its U.S. counterpart after Poloz left the main interest rate unchanged yesterday and said the strength of the currency is hurting exporters. Hedge funds and other large speculators have already amassed near-record bets this year for the local dollar to decline as Canada’s trade deficit came in nine times wider than forecast and a report showed the country shed jobs in December.
The drop pushed the currency below the median forecast of C$1.10 per U.S. dollar for the end of the year in a Bloomberg survey of 63 contributors, suggesting strategists will be revising estimates lower. While some investors speculated that the central bank would signal a bias toward easing policy, Poloz said his next rate move depends on how economic data change the balance of risks to the world’s 11th-largest economy.
“The bears are pushing on what very much appears to be an open door,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG, said by phone from New York. “The Bank of Canada is amenable to further currency weakness to help competitiveness.”
Canada’s dollar, often called the loonie for the aquatic bird on the C$1 coin, fell as much as 0.8 percent today to C$1.1174, the lowest level since July 2009, and was at C$1.1117 as of 8:48 a.m. in Toronto. That added to its 1.1 percent slide yesterday. Fair value is around C$1.15, according to Ruskin.
The loonie is the worst performer during the past one and six months against a basket of nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, with declines of 4.9 percent and 8.3 percent. Even so, the Canadian currency is still about 11 percent overvalued compared with its U.S. peer, according the Organisation for Economic Cooperation and Development’s purchasing-power data.
“Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports,” the bank said in its quarterly Monetary Policy Report.
Poloz told reporters at a press conference yesterday that the weaker currency will give an “extra kick” to the economy, and likened it to icing on a cake, with support for exports coming mainly from accelerating U.S. growth. Canada sends three quarters of exports to its southern neighbor.
“Without directly saying it, Poloz leaves the impression that he views the currency as being ‘too strong’ and would feel quite comfortable with a USD/CAD of C$1.15,” Kevin J. Hebner and Niall O’Connor, New York-based strategists at JPMorgan Chase & Co., wrote in a client note yesterday.
Speculative bets against the loonie outnumbered those for the currency by 67,345 contracts on Jan. 14, approaching the record 84,906 net-short positions reached in January 2007, according to data from the Washington-based Commodity Futures Trading Commission. A year earlier, futures showed net-long positions of 68,668 contracts.
“The Bank of Canada’s concern has been that the economy is suffering from a version of Dutch Disease, where commodity exports are crowding out any other exports, in particular manufacturing exports,” Valentin Marinov, the head of European Group of 10 currency strategy at Citigroup Inc., said by phone from London. “What they’re trying to promote is a mix of drivers for more sustainable growth.”
In the past decade, employment in the resource sector has increased 33 percent while manufacturing employment has fallen 23 percent, according to data compiled by Bloomberg. Since the depths of Canada’s 2009 recession, resource-industry jobs have increased 20 percent, while manufacturing has barely changed.
In the same period, the average price of oil increased 177 percent while the Canadian dollar appreciated 17 percent against its U.S. peer, reaching parity as recently as February.
“In the past, when we had a recession, the Canadian dollar would go down, so we had a bit of a buffer; in this case, it did the opposite,” Poloz said in a press conference. It creates “a two-speed economy, where the resource sector benefits from this combination of forces, while other sectors, like the manufacturing sector, has a more challenging time.”
Poloz is following officials from more than 12 other nations who have said monetary stimulus in large economies like the U.S. and Japan -- policies that have sparked accusations of currency wars -- inflated the value of their currencies to uncompetitive levels. Reserve Bank of Australia Governor Glenn Stevens has said the economy needs a weaker currency on at least five occasions since October.
The Australian dollar has declined 17 percent from its 2013-peak against a basket of nine developed-nation peers.
“The institutional debasing of currencies that began a couple years ago is continuing,” Adrian Miller, the director of fixed-income strategies at GMP Securities LLC, said in a phone interview from New York. “Now the flag is being carried by the Bank of Canada.”
The central bank kept its benchmark interest rate at 1 percent yesterday even as it predicted inflation will advance at an average annualized pace of 0.9 percent in the first three months of this year -- below the bank’s 1 percent-to-3 percent target band.
“Things have changed -- the primary participants in the currency wars were central banks in the emerging markets and the Bank of Japan,” said Marinov of Citigroup, which lowered its year-end forecast to C$1.12 from C$1.08. Now, for the Bank of Canada, “you would argue commentary on the currency may feature more prominently down the road.”
The bank reiterated the economy is around two years away from full output because company spending and shipments abroad have disappointed.
Canada’s November trade deficit widened to C$940 million ($843 million), Statistics Canada in Ottawa said Jan. 7. The median forecast was for a C$100 million deficit, according to a Bloomberg survey. Canada’s gross domestic product expanded 0.3 percent to an annualized C$1.60 trillion in October.
Canada’s economy still has “significant” excess capacity and inflation is being held down by global weakness in food prices and a recent increase in retail competition, the central bank said. Consumer prices will advance at an average year-over-year pace of 0.9 percent in the first quarter, before quickening to 1.5 percent in the fourth quarter, it forecast.
“They want a gradual weakening,” Daniel Janis, who oversees about $17 billion in fixed income for Manulife Financial Corp.’s asset-management arm, said yesterday in a phone interview from Toronto. He said he’s positioned for the loonie to fall another 3 percent to 5 percent. “We’re the most aggressive we’ve been because it’s almost 100 percent no-Canada.”
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