Canada Dollar Declines on Slump in 1st-Quarter Growth

The Canadian dollar declined the most in more than a week after a report showed economic growth slumped in the first quarter as a harsh winter in North America slowed housing construction, business spending and exports.

The currency trimmed a fourth monthly advance against its U.S. peer as gross domestic product grew at a 1.2 percent annualized pace in January through March, compared with a downwardly revised 2.7 percent in the prior three months, Statistics Canada said in Ottawa. Economists surveyed by Bloomberg predicted growth would slow to a 1.8 percent pace. The U.S. economy contracted at a 1 percent annualized rate in the first quarter, the Commerce Department reported yesterday.

“The GDP just disappointed in Canada,” Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s capital markets unit, said by phone from Toronto. “There could be another camp that looks at this and says, the U.S. printed minus 1 percent and we printed significantly better than that, so maybe this isn’t a sell-Canada environment. But markets are traditionally built around expectations, and expectation wasn’t met on this number.”

The loonie, as the currency is known for the image of the waterfowl on the C$1 coin, dropped 0.1 percent to C$1.0846 per U.S. dollar at 5 p.m. in Toronto after falling as much as 0.3 percent, the most since May 21. It gained 0.1 percent this week, extending its monthly advance to 1.1 percent. It is down 2.1 percent this year.

Rate Outlook

Bearish bets on the loonie by hedge funds and other speculators declined, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the Canadian dollar compared with those on a gain -- net shorts -- was 21,810 on May 27, compared with net shorts of 26,534 a week earlier.

While the pace of economic growth undershoots the first-quarter Bank of Canada forecast of 1.5 percent, it’s unlikely to lead to any policy shifts in the near term, Paul Ferley, an economist at RBC Capital Markets, said in a note to clients.

“Any shift in policy will be more influenced by the pace of growth beyond the first quarter and into 2015,” Ferley said. RBC predicts the central bank will make its first interest-rate increase since the financial crisis in the second quarter next year, one quarter before peers in a poll of 16 economists. “By the second quarter of 2015, the Bank of Canada is expected to resume a gradual pace of tightening with the overnight rate rising from 1 percent currently to 1.75 percent by the end of next year.”

The Bank of Canada is forecast to maintain the overnight rate at 1 percent on June 4 at its next monetary policy meeting, and leave it unchanged until the third quarter of 2015, according to the median estimate of 16 economists surveyed by Bloomberg.

The loonie has fallen 7 percent over the past year, the most among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Currency indexes. The U.S. dollar fell 1.5 percent. The pound leads gainers, adding 9.5 percent.

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 Kenneth Pringle, Greg Storey

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