Loonie Revival Seen Faltering Before Year High: Market Reversal

Photographer: Brent Lewin/Bloomberg

The Canadian dollar may have overreached itself and will be held back by weaknesses in the economy, with inflation slowing to the bottom of the central bank’s target band in February, according to Toronto-Dominion. Close

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Photographer: Brent Lewin/Bloomberg

The Canadian dollar may have overreached itself and will be held back by weaknesses in the economy, with inflation slowing to the bottom of the central bank’s target band in February, according to Toronto-Dominion.

The Canadian dollar’s best rally in 2 1/2 years will run out of steam before the currency revisits its high for 2014, the nation’s biggest lender predicts.

After climbing 3.7 percent to as much as C$1.0858 per U.S. dollar from an almost five-year low reached March 20, the loonie will gain another 1.1 percent to C$1.0735 before falling back, according to Toronto-Dominion Bank, which based its estimate on trading patterns. Technical signals known as Bollinger bands and stochastics suggest the currency may already be overstretched.

Canada’s dollar reversed two quarters of declines as reports showed the nation’s unemployment rate fell to match a five-year low and the trade balance swung into surplus for the first time since September. The currency may have overreached itself and will be held back by weaknesses in the economy, with inflation slowing to the bottom of the central bank’s target band in February, according to Toronto-Dominion.

“There’s nothing fundamentally different going on in Canada to suggest we should be seeing a significant rebound,” Shaun Osborne, the chief currency strategist at Canada’s biggest bank by assets, said by phone from Toronto yesterday. “We’re still seeing sluggish, I would call it, employment growth in Canada. The inflation trend is still very soft overall.”

Canada’s currency touched C$1.0858 per U.S. dollar, the strongest in three months, on April 9, after rebounding from C$1.1279 last month, the weakest level since July 2009. The advance was bigger than any monthly gain since October 2011.

Snapped Streak

The loonie, as the local dollar is known for the image of the aquatic bird on the C$1 coin, already snapped a four-day winning streak yesterday, depreciating 0.5 percent to C$1.0936. It weakened to C$1.0962 as of 7:55 a.m. in London. The currency reached its high for the year at C$1.0589 on Jan. 2.

JPMorgan Chase & Co. is more bullish than Toronto-Dominion, suggesting that Canada’s currency may strengthen to C$1.0645 before reversing.

The U.S. dollar-loonie rate reached the lower limit of its 20-day Bollinger band on April 4 for the first time since February, suggesting the Canadian currency’s gains are overdone. Developed by John Bollinger in the 1980s, the method helps identify the turning point in an asset’s trajectory.

The stochastic indicator’s so-called k-line rose above its d-line April 9, signaling an end to the Canadian dollar’s rally. The last time the two lines crossed, in March, coincided with the loonie snapping its slide.

Employment Gain

Canada’s dollar was supported by an April 4 report showing employment rose by 42,900 jobs in March, the most in seven months, and the jobless rate fell to 6.9 percent from 7 percent. The trade balance increased to a C$290 million ($266 million) surplus in February, from a C$337 million deficit the month before, Statistics Canada said April 3.

Those reports may fail to have a lasting effect on the currency because of weaknesses elsewhere in Canada’s economy, according to Toronto-Dominion.

Growth in gross domestic product will lag behind that of the nation’s biggest trade partner, expanding 2.3 percent this year, versus 2.7 percent in the U.S., according to economists surveyed by Bloomberg News.

Canada’s consumer-price index rose 1.1 percent in February from a year ago, following a 1.5 percent increase the prior month, an official report showed March 21. The central bank’s target range is 1 percent to 3 percent.

An end to the loonie’s rally would be welcome news for the Bank of Canada, which said in a monetary policy report in January that non-commodity exports were becoming uncompetitive even at an exchange rate of about C$1.1.

“It still looks like the longer-term trend is lower for the Canadian dollar,” Niall O’Connor, a technical analyst at JPMorgan, said in an April 9 telephone interview from New York. “If you look on a bigger scale, this is just a minor retracement so far. It’s still too early to say, at least from a technical perspective, that this is the start of a more significant trend.”

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Armstrong, Greg Storey

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