The Canadian dollar fell to its lowest level in four and a half years after the Federal Reserve increased its interest-rate forecasts, fueling speculation it will tighten monetary policy faster than the Bank of Canada.
The currency fell against the majority of its most-traded peers after Bank of Canada Governor Stephen Poloz said yesterday he wouldn’t rule out the possibility of rate cuts if the economy worsens. Fed officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market.
“CAD was sort of under pressure for the last 48 hours and the little jump in U.S. yields coming after the Fed meeting has helped push us through what was a key resistance level,” said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, by phone from New York. “Poloz said yesterday that he could not entirely rule out a rate cut and I guess that gives you in the forward guidance a little more dovish Bank of Canada than Fed.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.9 percent to C$1.1238 per U.S. dollar at 4:39 p.m. in Toronto, reaching the lowest since July 2009. One loonie buys 88.98 U.S. cents.
Canada’s benchmark 10-year government bond fell, with yields rising seven basis points, or 0.07 percentage point, to 2.48 percent, the highest level in a week. The 2.5 percent security maturing in June 2024 lost 65 cents to C$100.22.
Yields on the U.S. 10-year benchmark Treasury also touched a week high, gaining 10 basis points to 2.77 percent.
Canada auctioned C$3.3 billion ($2.9 billion) of two-year bonds at 1.042 percent. The debt carries a 1 percent coupon and matures in May 2016. The bid-to-cover ratio, a gauge of investor demand, was 2.69, higher than the previous two-year auction in January.
The Fed also slowed its monetary stimulus program designed to depress interest rates by reducing bond purchases by $10 billion to $55 billion per month.
The loonie added to losses after Fed Chair Janet Yellen reiterated in a press conference that the first increase to the benchmark interest rate would come a “considerable time” after the forecast end to monetary stimulus this fall, adding that could mean “six months or that type of thing.”
The Federal Open Market Committee discarded a jobless-rate threshold for considering when to raise borrowing costs and said it will look at a wide range of data after unemployment declined toward 6.5 percent, its previous threshold for a rate increase, faster than policy makers predicted.
Poloz’s comments yesterday came after a speech where he said first-quarter economic growth may be a bit “softer” than forecast in January due to severe winter weather, and that the global economy may experience a “secular stagnation” that holds down output gains and interest rates.