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Canadian Dollar Touches 4-Year Low Amid Central-Bank Speculation

The Canadian dollar reached a four-year low for a second day on speculation the nation’s central bank may signal at a meeting next week the need for lower interest rates amid faltering economic growth.

The currency erased losses as crude oil, Canada’s biggest export, climbed amid a drop in U.S. inventories. The loonie, as the currency is called, has fallen this month against 15 of 16 major peers as interest-rate expectations between the U.S. and Canada diverged, with the Federal Reserve slowing monetary stimulus. Bank of Canada officials meet Jan. 22, when they will also release a quarterly report on their view of the economy.

“People are starting to get the view the Bank of Canada is certainly not going to be raising rates, but might actually turn more dovish or even open the door to rate cuts,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “You’re getting to the sell-Canada kind of story.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, depreciated as much as 0.4 percent to C$1.0991 per U.S. dollar, the weakest since September 2009, before trading at C$1.0934 at 5 p.m. in Toronto, up 0.1 percent. One loonie buys 91.46 U.S. cents.

The currency’s 2.9 percent decline this year makes it the worst performer after South Africa’s rand and tenders that are pegged to the rand: the Lesotho loti, Swaziland lilangeni and Namibian dollar.

Relative Strength

The loonie may be poised to reverse its decline, a technical indicator signaled. The currency’s 14-day relative-strength index fell below 30 for a second day, the first time in five weeks it’s been below that threshold that long, which shows it may have weakened too much, too fast.

West Texas Intermediate crude advanced after a government report showed U.S. inventories tumbled to the lowest level in almost 22 months. Futures jumped as much as 2.2 percent, the most on an intraday basis since Dec. 3, to $94.64 a barrel in New York.

Canada’s benchmark 10-year government bonds were little changed after fluctuating earlier. They yielded 2.58 percent. The price of the 1.5 percent securities maturing in June 2023 increased 6 cents to C$91.10.

The yield advantage of Treasury 10-year notes over their Canadian peers, an indication of the U.S. economy’s prospects for growth, widened to 31 basis points. That’s the biggest difference since December 2010.

Bond Auction

The Bank of Canada auctioned C$3.4 billion ($3.1 billion) of five-year bonds at an average yield of 1.887 percent. The 1.75 percent securities, which mature in March 2019, attracted total bids of C$8.85 billion, for a bid-to-cover ratio, a gauge of demand, of 2.60. The Nov. 6 offering of five-year debt drew an average yield of 1.907 and a coverage ratio of 2.63.

The Canadian currency may weaken to C$1.12 per U.S. dollar in the next three months on the increased chance Bank of Canada Governor Stephen Poloz will indicate as early as next week that lower interest rates are needed, UBS AG analysts Gareth Berry and Geoffrey Yu wrote in a note to clients.

A report last week showing a trade deficit nine times wider than economists forecast started the Canadian currency’s plunge. While the Bank of Canada is expecting exports to revive flagging growth, Poloz said in a Dec. 17 interview that he doesn’t “fully understand” why shipments haven’t been stronger. Interest rates will stay at 1 percent until there are signs of sustained economic growth, Poloz said.

Competitive Lift

“It makes sense why the governor is sounding as dovish as he is,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities, said by phone from Toronto. “Behind closed doors, he’s happy to see the weakness in the currency just because it does ultimately give exports a little bit more of a lift in terms of their competitiveness.”

Poloz surprised investors in October by dropping language from a policy statement about the need for future interest-rate increases, citing slack in the economy. The language had been in place for more than a year.

Employment in Canada unexpectedly fell in December, declining by a net 45,900 jobs, the nation’s statistics agency reported on Jan. 10. The jobless rate jumped to 7.2 percent, taking it above the U.S. unemployment measure, which was 6.7 percent last month, for the first time since 2008.

“A weak economy in Canada, it just provides the environment for a weak Canadian dollar,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “The market is pushing out the first hike on the timeline.”

Export Obstacles

Investors such as Amundi Asset Management and Brandywine Global Investment Management LLC have joined hedge funds and other speculators in betting against the loonie on a view that exports will be hampered by lack of pipeline infrastructure for shipping crude oil and a shrunken manufacturing sector.

The loonie could weaken to C$1.17 per U.S. dollar by the second half of this year and C$1.30 by the end of next year, according to Jack McIntyre, who helps manage $38 billion in bonds from Philadelphia for Brandywine, and is borrowing the currency to invest in higher-yielding assets.

U.S. central bankers said Dec. 18 they will cut monthly bond purchases to spur growth to $75 billion from $85 billion, citing economic improvement. They will reduce the amount by $10 billion at each meeting this year before ending the program in December, according to a Bloomberg survey of economists taken Jan. 10.

The Fed said today “moderate” growth across most of the U.S. last month was buoyed by gains in holiday spending by consumers, an improving labor market and strength in manufacturing. Economic prospects are “positive in most districts,” the Fed said in its Beige Book business survey, based on reports gathered on or before Jan. 6. Fed policy makers meet Jan. 28-29.

The U.S. dollar rose against most major peers as a report showed manufacturing in the New York region grew more than forecast and the World Bank increased its global economic-growth estimate.

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