Loonie Reverses as Poloz Muted by Faster Inflation

Photographer: Cole Burston/Bloomberg

Since he took over at the central bank last year, Bank of Canada Governor Stephen Poloz’s statements have shifted from cautioning about the need for rate increases to a neutral view that leaves open the possibility of a cut to prevent deflation. Close

Since he took over at the central bank last year, Bank of Canada Governor Stephen... Read More

Close
Open
Photographer: Cole Burston/Bloomberg

Since he took over at the central bank last year, Bank of Canada Governor Stephen Poloz’s statements have shifted from cautioning about the need for rate increases to a neutral view that leaves open the possibility of a cut to prevent deflation.

Bank of Canada Governor Stephen Poloz is done hinting at the need for lower interest rates, if the $5.3 trillion-a-day foreign-exchange market is any guide.

Hedge funds and other large speculators turned bullish on the Canadian loonie this month after 70 weeks of net-short wagers, the longest streak of pessimism in the currency’s history. The local dollar was the best Group of 10 performer in the second quarter after being last from January through March. Strategists surveyed by Bloomberg have raised their forecasts faster than for any developed-nation peer except the pound.

“People are starting to realize the Bank of Canada is probably not going to cut interest rates because the economy is doing OK and the housing market isn’t collapsing,” Krishen Rangasamy, a senior economist at National Bank of Canada in Montreal, said in a July 7 interview. “You see that reflected in the speculative positions, you see that reflected in the Canadian dollar.”

Strategists say Poloz can act less like a dove at next week’s policy meeting with inflation back above the central bank’s 2 percent target for the first time since 2012 and a report showing developers broke ground on the most new homes in eight months in June.

Talking Power

Since he took over at the central bank last year, Poloz’s statements have shifted from cautioning about the need for rate increases to a neutral view that leaves open the possibility of a cut to prevent deflation. He has occasionally referenced the importance of a weaker currency to support exports.

His public pronouncements have had almost three times more impact on his nation’s currency than his colleagues in Japan, Australia and Europe, according to Citigroup Inc. data last month, weakening the dollar 0.27 percent on average.

The loonie, as the currency is known for the image of the aquatic bird on the C$1 coin, fell to a 4 1/2-year low of C$1.1279 versus the U.S. dollar on March 20, two days after Poloz reiterated that a rate cut couldn’t be ruled out. It traded at C$1.0658 as of 8:14 a.m. in London.

Bets that Canada was due for a U.S.-style housing crash were reflected in the near record net-short positions in the futures market reached against the loonie in January.

‘Housing Bubble’

“One of the principle bets by the bears was that the Canadian housing bubble, whether actual or perceived, was going to burst and cause the same sort of credit development here as happened in the States,” David Rosenberg, the Toronto-based chief economist at Gluskin Sheff & Associates Inc., which manages C$7.2 billion ($6.8 billion), said July 7 by phone. “Patience runs thin and it costs money to be short.”

The bears finally surrendered during the week ended July 1, when speculative bets for gains in the loonie versus its U.S. peer exceeded wagers on a decline by 2,695 contracts, Commodity Futures Trading Commission data show.

That’s the first time the loonie had a net-long position in the futures market since February 2013. Bets against the loonie reached 70,327 on Jan. 24, approaching the record 84,906 net shorts in January 2007.

The bears may have capitulated too soon, according to Luc de la Durantaye of CIBC Global Asset Management Inc., who said he boosted his own short position last week.

Economic Recovery

Montreal-based de la Durantaye, whose company manages C$17 billion of foreign-exchange, said Poloz will repeat that the nation’s economic recovery depends on more exports, which relies on a weaker currency.

“If we’re right, the BOC is not going to be comfortable with the dollar having gone from C$1.12 to C$1.06,” he said in a July 7 phone interview. “They’ll probably make people understand there are still imbalances in Canada that need to be corrected. And part of the solution is a weaker dollar, not a stronger dollar.”

Canada’s currency has recovered as official reports in recent weeks showed a pickup in inflation and improvement in the housing market.

Annual inflation accelerated to a 2.3 percent pace in May, up from 2 percent the prior month, a Statistics Canada report showed on June 20. The median forecast of economists surveyed by Bloomberg was prices to continue rising at a 2 percent pace.

A total of 198,200 new houses started construction in June, up from 197,000 the prior month and compared with a median economists’ forecast of 190,000, yesterday’s report from the Canada Mortgage & Housing Corp. showed. Housing starts fell to 157,478 in March, the least since July 2009.

Best Performer

The Canadian dollar’s 2.1 percent gain versus the greenback since April 9 pares a 3.9 percent decline in the first quarter.

Over the past three months, the currency has also been the best performer against a group of nine developed-nation peers tracked in Bloomberg Correlation Weighted Indexes, rising 3.5 percent against the basket compared with a 5 percent drop from January to March that was its biggest quarterly slump since 2010.

While still predicting a decline, the median of 48 year-end estimates in a Bloomberg survey climbed to C$1.11, from C$1.14 on March 18. That follows a more than 17 percent cut in forecasts from December to mid-March.

Gross domestic product is forecast in a Bloomberg survey to grow 2.2 percent this year, compared with an average 1.9 percent across the G-10. The BOC cut its overnight lending rate to as low as 0.25 percent in 2009, before raising it to 1 percent. It was 4.5 percent before the global financial crisis.

BNP Paribas SA predicts Canada’s currency will be at C$1.10 by year-end. The loonie should outperform peers including the Australian dollar, “particularly if the Bank of Canada strikes a less dovish tone at next week’s policy meeting,” BNP Paribas strategists including London-based Kiran Kowshik, said yesterday in a client note. “Housing starts are key.”

(An earlier version of this story was corrected to amend the number of months in fourth paragraph and the date in 20th.)

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, Kenneth Pringle

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.