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Canada Dollar Touches Weakest in Almost a Month on BOC

Canada’s dollar touched the weakest level in almost a month after the central bank said persistent sluggishness in the nation’s economy will curb a temporary acceleration of inflation.

The currency erased losses after Bank of Canada Governor Stephen Poloz refrained from commenting on its strength as he said the economy won’t reach its full potential until mid-2016, about three months later than the bank projected in April. Crude oil, Canada’s biggest export, climbed. The central bank held the key interest rate at 1 percent, as forecast, with a neutral outlook on whether the next move will be up or down.

“He pushed back when the output gap closes by a quarter, effectively he’s pushed back when the Bank of Canada is going to hike by a quarter,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by phone from New York. “He’s painted a case that should lead to further Canadian-dollar weakness.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated as much as 0.3 percent to C$1.0794, the weakest level since June 20, before trading at C$1.0741 at 5 p.m. Toronto time, up 0.2 percent. One Canadian dollar purchases 93.10 U.S. cents.

Canada’s government bonds rose, with the yield on the benchmark 10-year security falling two basis points, or 0.02 percentage point, to 2.20 percent. The yield reached 2.19 percent, after touching 2.18 percent on July 10, the lowest level since June 2013.

‘Stronger Exports’

The Bank of Canada has kept the rate for overnight loans between banks unchanged since September 2010 to support the economy. All 21 economists in a Bloomberg survey forecast policy makers would hold it at 1 percent today.

Poloz is seeking to nurse the world’s 11th largest economy back to full output with low interest rates while fulfilling a mandate to keep inflation at 2 percent. He’s relying on an increase in exports to lead a recovery has been driven mostly by consumer spending since the 2008-2009 recession.

Completing a recovery in two years “is reliant on continued stimulative monetary policy and hinges critically on stronger exports and business investment,” policy makers led by Poloz, 58, said in a statement from Ottawa.

The loonie erased losses after Poloz concluded a press conference following the rate decision.

“The market was expecting Poloz to talk the Canadian dollar down in a nuanced way, and he really didn’t,” said Bank of Montreal’s Anderson. “It’s not anything that’s going to extend into tomorrow.”

Lowered Forecasts

The central bank also cut the forecasts it made in April for Canada’s growth, to 2.2 percent from 2.3 percent for this year, and to 2.4 percent from 2.5 percent for next year. It lowered its 2014 world growth projection to 2.9 percent from 3.3 percent, led by weakness in the U.S., Europe and China.

“They’ve put themselves in a very skeptical position about any good news,” Adam Button, a currency analyst at Forexlive.com, said in a phone interview. “That signals to the market that rates will stay unchanged through 2015 and beyond.”

The loonie has swung between a 4 1/2 year low and a six-month high this year as investor speculation fluctuated on when interest rates might be raised.

It slumped in March to C$1.1279, the weakest level since July 2009, after Poloz said he couldn’t rule out a rate cut to head off the risk that low inflation would slip into deflation.

CPI Gains

The currency rebounded as the consumer-price index increased an annualized 2 percent in April, meeting the central bank’s inflation goal after slumping below it for 23 straight months. The gauge rose 2.3 percent in May, the first time above the goal since February 2012. The currency reached C$1.0621 on July 3, the strongest since Jan. 6.

Poloz said the quickening in inflation has been caused by one-time gains in energy and import prices, not changes in economic fundamentals.

“The bank’s judgment is that underlying inflationary pressures remain muted,” policy makers said in their quarterly economic forecast paper. “Beyond the near term, the inflation projection is little changed” from three months ago.

Annualized inflation held at 2.3 percent in June, economists in a Bloomberg survey estimates before a CPI report due July 18.

“The reaction until then is going to be somewhat muted,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, said in a phone interview.

Futures on crude oil jumped 1.6 percent, the biggest increase since June 12, to $101.57 a barrel in New York.

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