Canada Dollar Falls as Economy Decline Trims Rate View

Canada’s dollar fell the most in one month against its U.S. counterpart after the nation’s gross domestic product unexpectedly shrank in February, weakening the argument for higher borrowing costs.

The currency extended losses after a report showed the economy was hurt by mining shutdowns and the first drop in manufacturing in six months. The Canadian dollar advanced against all of its major counterparts except the yen last week on speculation the Bank of Canada will become the first among Group of Seven peers to raise borrowing costs.

“The number this morning has taken the whole market by surprise,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp. “Aggressive long positions in Canadian dollars were quickly taken out.” A long position is a bet that an asset will increase in value.

Canada’s currency, nicknamed the loonie, declined 0.7 percent to 98.72 cents per U.S. dollar at 5:02 p.m. in Toronto It fell as much as 0.9 percent, the most since March 20. The currency touched 98 cents on April 27, the strongest since September. One Canadian dollar buys $1.0130.

The loonie has appreciated 1.2 percent this month versus the greenback in the fourth-best performance among its 16 most-traded peers, trailing the yen, the pound and Singapore’s dollar. The Canadian dollar is up 3.4 percent this year.

Rate Projections

The probability central bank Governor Mark Carney will raise rates by September fell to about 66 percent after the GDP report, representing 22 basis points of tightening, or less than a full quarter-percentage point, according to Bloomberg calculations based on overnight index swaps. Odds were 75 percent at the end of last week, with 27 basis points priced in.

The Canadian dollar is likely to lose momentum later this year as “markets realize that the Bank of Canada isn’t going to be able to tighten in the way it’s pricing in,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, said in a Bloomberg Television interview. Stretch said he is forecasting a price of 96 cents per U.S. dollar and parity by the end of the year, and no interest-rate move by the Bank of Canada this year.

Government bonds rose, pushing the benchmark two-year yield down eight basis points, or 0.08 percentage point, to 1.34 percent, the biggest one-day drop since Dec. 1. The price of the 0.75 percent securities due in May 2014 advanced 16 cents to C$98.85.

Economic Data

Economic output fell 0.2 percent to an annualized C$1.28 trillion ($1.30 trillion) after a January gain of 0.1 percent, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News had forecast a 0.2 percent increase, according to the median of 24 responses.

The world’s 10th largest economy will be challenged by the “persistent strength” of the Canadian dollar and slow growth in the U.S. and Europe, Carney said in April 27 remarks in Ottawa. Carney is relying on consumption and housing to contribute two-thirds of the country’s projected 2.4 percent economic growth this year.

The Canadian dollar rose 1.1 percent during the past three months in the third-best performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The biggest gainer was the British pound, up 2.6 percent.

“We’ve seen investors adding to long positions; I think there is some way to run in that,” Stretch said. “The question is whether the data will be strong enough to back up that degree of rate tightening. I’m not convinced it’s going to come through in the way markets are anticipating.”

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