Canada Dollar Weakens to Four-Year Low Amid Rate-Cut Speculation

The Canadian dollar reached the weakest level since 2009 amid speculation slowing economic growth will push the Bank of Canada closer to considering lowering interest rates.

The currency sank against 15 of its 16 major peers as Canadian housing starts and building permits fell. Data earlier this week showed the country’s trade deficit swelled to nine times the forecast and a purchasing-manager index slid to a four-year low. Hiring slowed in December, a Bloomberg survey forecast before a report due tomorrow. Bank of Canada Governor Stephen Poloz said this week he’s under no pressure to raise interest rates.

“We saw weak trade, weak manufacturing and the central bank following up by saying we have no timeline to raise rates any time soon,” said Brad Schruder, director of foreign exchange at Bank of Montreal, by phone from Toronto. “That’s like the trifecta of death for the loonie.”

The loonie, as the Canadian dollar is nicknamed for the image of the waterfowl on the C$1 coin, depreciated 0.2 percent to C$1.0842 per U.S. dollar at 5 p.m. in Toronto in its fourth daily loss. It touched C$1.0875, the weakest level since October 2009. One loonie buys 92.23 U.S. cents.

“Everybody is all over Canada dollar at the moment, that’s kind of the trade du jour,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview.

Spread Shrinks

The extra interest Canada’s two-year government bonds yield over U.S. peers -- the bond spread most closely tied to exchange rates -- narrowed to 66 basis points, or 0.66 percentage point, the least since June 2012. That dims the allure of Canadian-dollar denominated securities versus their U.S. counterparts.

The 10-year government bond rose, with yields decreasing four basis points to 2.68 percent. The 1.5 percent security due in June 2023 added 30 cents to C$90.27. U.S. Treasury 10-year yields traded at 2.97 percent after reaching 3.05 percent Jan. 2, the highest since July 2011.

The loonie dropped 1.8 percent over the past week versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes, the worst performance. The U.S. dollar gained 0.5 percent.

“It’s been a very quick move of late, a lot of it on the continued dovishness of the Bank of Canada coupled with weaker fundamentals,” said Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, by telephone from Toronto. “You factor in the higher U.S. yields, and the Canadian dollar is on its heels right now.”

Relative Strength

A technical indicator signaled the currency may be poised to reverse losses. The loonie’s 14-day relative strength index against the greenback dropped to 30, meaning the currency may have fallen too far, too fast. It also traded below its lower 30-day Bollinger band, another technical gauge that shows price moves may be due for a reversal.

Canada’s dollar tumbled 6.6 percent in 2013, its biggest drop in five years, as accelerating economic growth in the U.S. convinced the Federal Reserve to start slowing monetary stimulus even as the Bank of Canada warned of deflationary risks. In a Dec. 17 interview with Bloomberg News, Poloz said inflation has been “lower than we can explain” while exports and investment have been disappointing.

Poloz said in an interview broadcast Jan. 7 by the Canadian Broadcasting Corporation that while he plans to keep interest rates on hold, there’s room to cut them if necessary.

Maneuvering Room

“Adjusting rates is always a tool,” Poloz said. “We have some room to maneuver, unlike other central banks, but we have to consider in the broader context what impact it would have.”

The odds that the central bank will cut its 1 percent benchmark interest rate by year-end rose to 22 percent, from 12 percent yesterday, according to Bloomberg calculations based on trading in overnight index swaps.

“There are fears that maybe we would have a rate cut,” said Jane Foley, a senior currency strategist at Rabobank International, by phone from London. “That leaves the Canadian dollar quite vulnerable, at least through the first half of the year.”

U.S. policy makers began slowing stimulus this month as the economy of Canada’s biggest trade partner improves, cutting monthly bond purchases to $85 billion from $75 billion. The Fed said last month more stimulus may be withdrawn as the economy strengthens further.

Jobs Reports

Canada will report tomorrow employers added 14,100 jobs in December, compared with 21,600 the previous month, according to a Bloomberg survey.

In the U.S, data today showed jobless-benefit applications fell last week to the lowest in a month before a report tomorrow forecast to show the U.S. added 197,000 jobs in December after payrolls expanded by 203,000 the previous month. Claims declined by 15,000 to 330,000 in the period ended Jan. 4, the Labor Department said.

“That’s one I know a lot of people are watching going into tomorrow with the Canadian economy having huge ties to the U.S. economy,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said in a phone interview. “Both the U.S. payrolls report and also the Canadian payrolls report, two pretty important data releases for the Canadian dollar, so there’s a lot of interest.”

Trade Deficit

Canada’s trade deficit unexpectedly widened in November to C$940 million ($875 million) as imports of machinery and equipment increased, Statistics Canada said Jan. 7. Economists in a Bloomberg survey forecast a C$100-million shortfall. Western University said its Ivey purchasing-managers index fell to 46.3 in December, the lowest since May 2009. Economists had projected an increase to 54.5 from November’s reading of 53.7.

Building permits decreased in November for the first time in three months, Statistics Canada data showed today. The value of municipal permits fell 6.7 percent to C$6.75 billion ($6.22 billion), versus a Bloomberg forecast for a 2.7 percent reduction. Housing starts fell to 189,700 in December, from 197,800 the previous month, another report showed.

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