The Bank of Canada will signal the need for lower interest rates at next week’s policy meeting as officials seek to boost economic growth by devaluing the currency, according to Societe Generale SA.
“They’ll move to an easing bias in the next meeting,” said Sebastien Galy, senior foreign-exchange strategist at Societe Generale, by phone from New York. “The Canadians have most probably decided they’re too expensive and need to reprice the economy.”
The Canadian dollar has dropped 5 percent against the U.S. dollar and touched a four-year low, since Oct. 23, when Bank of Canada Governor Stephen Poloz dropped language about the need for higher rates that had been inserted into policy statements by his predecessor Mark Carney more than a year earlier. During a Dec. 12 press conference, Poloz said the shift was to head off the dangers of low inflation and the central bank had no view on the currency.
Canadian Prime Minister Stephen Harper said he thinks the central bank’s monetary policy remains appropriate amid a recent weakening in the country’s currency, in an interview today with Bloomberg News.
Harper said what matters is not the movement in the Canadian dollar but whether it is “at an appropriate level given various economic realities,” and that the weaker currency reflects strength in the U.S. dollar, which “has been undervalued.”
The currency erased gains after Harper’s comments to end today little changed at C$1.0930 per U.S. dollar. Yesterday the currency fell to C$1.0991 per U.S. dollar, the lowest since Sept. 2009. One loonie buys 91.48 U.S. cents.
The Bank of Canada will announce its next interest rate decision on Jan. 22.
The Bank of Canada is implicitly seeking to lower the currency to make the country’s exports more competitive, Galy said. Canada has seen manufacturers’ contribution to gross domestic product shrink to 10.5 percent in October from 16 percent in August 2000 as the currency climbed to parity with the U.S. over the last decade, data compiled by Bloomberg shows.
“The new governor definitely acts with a trade angle, which is probably correct, and he’s trying to do that rebalancing,” Galy said. “Foreign-exchange markets really love a central bank that gives you a wink-wink and a nudge-nudge, and the Bank of Canada has typically been really good at orienting the market.”
Fair value for the Canadian dollar could see it fall as low as C$1.25 per U.S. dollar, Galy said. That level was last reached in April 2009.