The Canadian dollar weakened to C$1.10 for the first time in more than four years amid speculation the U.S. Federal Reserve will slow its monetary stimulus as the Bank of Canada signals more may be on the way.
The currency sank against most major peers before a central-bank rate decision tomorrow that will follow weaker-than-forecast economic reports this month. The bank may signal in a policy statement it favors lower interest rates, only three months after dropping a bias toward higher rates. The Fed will keep reducing monthly bond purchases it makes to spur economic growth, according to economists in a Bloomberg survey.
“The impression these two central banks are going in opposite directions really takes the stuffing out of the Canadian dollar,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities, said from Toronto in a phone interview. “The next logical step is for the bank to adopt an outright easing bias. Instead of the long-held view that the next move by the Bank of Canada would be up, that it would be down.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, depreciated 0.2 percent to C$1.0967 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.1019, the weakest level since Sept. 4, 2009. One loonie buys 91.18 U.S. cents.
The currency pared losses after data today showed Canadian factory sales in November gained 1 percent to C$50.5 billion ($46 billion), the highest in almost two years. Economists in a Bloomberg News survey forecast a 0.3 percent increase.
The loonie may be poised to reverse its decline, a technical indicator signaled. The currency’s 14-day relative-strength index fell for a sixth day below 30, the level that shows the currency may have weakened too much against its U.S. counterpart. It was the longest stretch below the threshold since March 2013.
Canada’s benchmark 10-year government bonds declined for the first time in five days, pushing yields up two basis points, or 0.02 percentage point, to 2.51 percent. They sank yesterday to 2.47 percent, the lowest since Nov. 1. The price of the 1.5 percent securities due in June 2023 fell 13 cents to C$91.67.
U.S. interest rates have risen as the Federal Reserve reduced the size of the monthly bond purchases it makes to depress borrowing costs to $75 billion this month, from $85 billion. The Fed will keep tapering the purchases in $10 billion increments at each of its policy meetings this year, according to a Jan. 10 Bloomberg survey of 41 economists.
The Canadian dollar has lost 6.2 percent since Bank of Canada Governor Stephen Poloz on Oct. 23 dropped language about raising interest rates that had been inserted more than a year earlier by his predecessor, Mark Carney.
Speculators have increased bets against the loonie this year as Canada reported a November trade deficit nine times wider than forecast and the first net job losses in five months in December. The trade shortfall was C$940 million, versus a C$100 million forecast in a Bloomberg survey, while the nation lost 45,900 positions, compared with a Bloomberg poll’s projection for a gain of 14,100.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar against the greenback compared with those on a gain, known as net shorts, increased to 67,345 as of Jan. 14, the widest since May, data from the Washington-based Commodity Futures Trading Commission show.
The Bank of Canada is forecast to leave its benchmark interest rate unchanged at 1 percent tomorrow by all 21 economists in a Bloomberg survey. The bank won’t add an easing bias at the meeting, according to economists in a separate Bloomberg poll conducted last week.
“We’re not expecting any change,” said Ian Gordon, Group of 10 foreign-exchange strategist at Bank of America Corp., by phone from New York. “Because the market has priced in a shift toward an easing bias, given the price action we’ve seen, if they don’t change anything, the risk is you get a strengthening of the Canadian dollar because some of those people were expecting an explicit shift.”
Gordon said his bank’s internal flow data show clients paring bets against the loonie before the central-bank meeting.
The Canadian dollar dropped 3 percent over the past month in a basket of 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, the worst performance. The U.S. dollar rose 0.4 percent.