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Canada’s Dollar Approaches Four-Month Low as Inflation Slows

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Aug. 22 (Bloomberg) -- The Canadian dollar traded at an almost four-month low after a government report showed the inflation rate slowed for the first time in five months in July.

The currency has weakened this week versus its U.S. counterpart amid speculation the Federal Reserve is moving closer to increasing interest rates next year than the Bank of Canada. The consumer price index rose 2.1 percent in July from a year ago following June’s 2.4 percent pace, Statistics Canada said today. Economists surveyed by Bloomberg News forecast a 2.2 percent pace, according to the median of 20 responses.

“Initially we had a weakening in the Canadian dollar as everyone’s eyes went to CPI, which was softer than expected, so that provides some more leeway for the Bank of Canada to maintain its neutral tone,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by telephone from Toronto.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at $1.0943 per U.S. dollar, as of 5 p.m. in Toronto. The currency weakened to as low as C$1.0980, approaching the low of C1.0986 reached on Aug. 6, the least since May.

Fed Chair Janet Yellen told policy makers meeting at Jackson Hole, Wyoming, today that the U.S. economy has made “considerable progress” in recovering from the financial crisis, even as slack remains in the U.S. labor market. Yellen reiterated that the Fed expects to end its program of asset purchases in October.

Rate Speculation

Bank of Canada Governor Stephen Poloz, who has kept the central bank’s benchmark rate on overnight loans between commercial banks unchanged at 1 percent since taking the post last year, has been saying that quickening inflation in recent months was caused by one-time gains in energy and import prices, not changes in economic fundamentals, hinting it’s not a concern for policy makers. Canada’s inflation rate had been accelerating since touching a 2014 low of 1.1 percent in February.

Canadian retail sales rose 1.1 percent in June, a gain that exceeded all economist forecasts, a separate report showed. Sales increased to C$42.6 billion ($38.9 billion), Statistics Canada said. Economists forecast a 0.3 percent gain.

The central bank remained neutral last month on whether the next interest-rate move will be up or down. It has kept borrowing costs unchanged since 2010 to support the economy. Policy makers’ monetary-policy report cut the forecasts they made in April for Canada’s growth this year to 2.2 percent from 2.3 percent.

The Canadian dollar 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. It rebounded as consumer prices increased, reaching C$1.0621 on July 3, the strongest level since Jan. 6.

To contact the reporters on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net; Rachel Evans in New York at revans43@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey

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