The Canadian dollar rose the most in a week after the Bank of Canada noted a jump in exports even as it left its benchmark interest rate unchanged, saying foreign trade must be sustained to trigger broader economic growth.
The currency appreciated against most of its major peers after Bank of Canada Governor Stephen Poloz reiterated the central bank’s neutral outlook on the next move in interest rates. The central bank is counting on export growth to spur domestic business investments and economic growth as the over-indebted consumers who led the country out of recession pare back spending.
“It’s more optimistic,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “It continues to cite risks globally, but it’s tacitly more optimistic on the Canadian economy.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.4 percent to C$1.0889 per U.S. dollar at 5 p.m. in Toronto. It reached the largest gain since Aug. 27. One loonie buys 91.84 U.S. cents.
With the Bank of Canada signaling it will be on hold, Canadian securities will likely maintain their yield advantage over the U.S., setting the stage for the currency to rise to C$1.06 per U.S. dollar by the middle of next year, Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said in a research note to clients. The Federal Reserve is forecast to start raising interest rate next year.
“We expect the Canadian currency to weaken anew once Fed tightening nears, and see this weakening as a potentially more significant trend for corporates and investors,” he wrote, predicting the currency would again fall to C$1.10 per U.S. dollar by early 2016.
Canada’s government bonds rose, pushing the yield on the benchmark 10-year security down one basis point, or 0.01 percentage point, to 2.08 percent. The yield touched the highest level since Aug. 13. The price of the 2.5 percent debt maturing in June 2024 added eight cents to C$103.65.
“The bank remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks,” policy makers led by Poloz said from Ottawa.
The decision extends Canada’s longest rate pause since the 1950s and economists predict Poloz won’t raise interest rates before next year as the recovery builds. The bank’s one-page statement contained multiple references to the economy advancing as anticipated, and said the recent quickening of inflation past the 2 percent target was caused by temporary factors.
Exports in the second quarter were supported by stronger U.S. demand and the past depreciation of the Canadian dollar, the Bank of Canada said. Shipments abroad jumped at an annualized 17.8 percent pace between April and June, leading the GDP gain.
“It suggests the export sector was driven by weakness in the Canadian dollar, though it doesn’t specifically mention that it wants more weakness out of the Canadian dollar,” Spitz said.
Canada’s dollar has weakened about 6 percent against the U.S. dollar since Poloz succeeded Mark Carney in June of last year. Business investment has remained subdued even amid signs of stronger growth in the U.S., Canada’s largest trading partner, where the expansion reached a 4.2 percent rate in the second quarter.
A report last week showed economic growth in the second quarter was 3.1 percent at an annual rate, compared with the 2.7 percent forecast in a Bloomberg economist survey.
Canada’s inflation rate slowed to 2.1 percent in July from 2.4 percent in June, after accelerating from 0.7 percent in October. The rise in the inflation rate was caused by a temporary increase in energy prices and the effect of a weaker currency, and not “any change in domestic economic fundamentals,” the bank said.