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Canadian Dollar Touches Eight-Month Low as Growth Stalls

The Canadian dollar touched the lowest level in eight months as a report showed economic growth stagnated in the fourth quarter, fueling speculation the Bank of Canada will move further from withdrawing monetary stimulus.

The currency erased the loss versus its U.S. counterpart as some traders speculated the decline has gone too far. Gross domestic product grew at a 0.6 percent annualized pace from October to December, the slowest since the second quarter of 2011, Statistics Canada said today from Ottawa. The Bank of Canada meets on interest rates next week.

“The Canadian growth outlook is softening and because of that people are going to start pricing in more gradual tightening from the Bank of Canada,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto.

The loonie, as the Canadian dollar is known for the image of the water fowl on the C$1 coin, rose 0.4 percent to C$1.0268 per U.S. dollar at 5 p.m. in Toronto. Earlier it touched C$1.0342 per U.S. dollar, the weakest since June. One loonie buys 97.39 U.S. cents.

The currency fell 3.3 percent in February, a second consecutive monthly decline and the biggest drop since May.

Canada’s benchmark 10-year government bond rose, with yields falling four basis points, or 0.04 percentage point, to 1.80 percent. The 2.75 percent security maturing in June 2022 gained 33 cents to C$108.08.

‘Fear Factoring’

“You had some fear factoring yesterday that maybe the number will be worse than the consensus expected, so the reaction was a little bit of short covering,” said Clement Gignac, chief economist at Industrial Alliance Insurance & Financial Services Inc. by phone from Quebec City. “Looking ahead for me, I really believe we’re headed toward a period of significant weakness for the Canadian dollar.”

Traders will seek to protect themselves against losses by making bets against a security or currency through options or by borrowing an asset and selling it with the intention of purchasing it back later at a cheaper price and pocketing the difference. They’ll often unwind the trade if a price move is less than anticipated.

Household consumption led economic growth in the fourth quarter with a 2.7 percent annualized gain while business spending on inventories was the only major category to show a decline, falling by C$10.3 billion ($9.97 billion) at annual rates, Statistics Canada said.

“I would suggest the Canadian dollar rebounded because inventory has driven the weakness, because it leads people to say, well we’re going to see strength on the other side of that as companies rebuild their inventories,” Doyle said. “The headline number looks weaker than the underlying growth dynamic.”

Carney Warning

Futures traders reversed their bets the Canadian dollar will rise against the greenback, betting it will fall for the first time in eight months, figures from the Washington-based Commodity Futures Trading Commission show.

Hedge funds and other large speculators had 21,433 more bets the Canadian dollar would fall than bets it would gain, so-called net shorts, as of Feb. 26, compared with 19,379 more bets it would gain, or net-longs, a week earlier.

The last major report before the Bank of Canada’s March 6 policy announcement fell short of Governor Mark Carney’s Jan. 23 projection of a 1 percent expansion rate. Signs that the world’s 11th largest economy is struggling to reach full output led Carney to say that an increase in his benchmark interest rate is “less imminent.” The bank has warned interest rates could rise in every decision since April.

Canada’s slow growth adds to poor economic data from Europe that has prompted most currencies to fall against the U.S. dollar today as investors seek safety.

A gauge of manufacturing in the 17-nation euro area was 47.9 in February, London-based Markit Economics said, below the level of 50 that shows contraction. Unemployment in the region climbed to 11.9 percent in January, the highest since the data series started in 1995, the European Union statistics office said. A British factory index unexpectedly shrank in February as well, according to Markit economics.

Correlation Indexes

“I still think U.S. dollar will continue to appreciate against most of the major currencies, given the risk-off environment we’ve been seeing the last few weeks,” said Blake Jespersen, managing director of foreign exchange at Bank of Montreal, by phone from Toronto. “The Canadian dollar is going to weaken further.”

The loonie has fallen 0.87 percent in the past year among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar has gained 3 percent and the euro has risen 1.5 percent.

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