Loonie Falls After Poloz Says Strong Currency May Change Outlook

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The Canadian dollar fell after the central bank left borrowing costs unchanged and highlighted the strong currency, which may reverse the stimulative financial conditions it achieved with a rate cut earlier in the year.

The currency weakened to its lowest in a month against the greenback as the overnight lending rate was kept at 0.75 percent for a third straight meeting, following a 0.25 percentage-point cut in January. The central bank said in a statement economic performance has been consistent with its forecasts for faster growth this quarter, though a sustained rally in the Canadian dollar may damp its outlook.

“The most interesting tidbit from the short statement is that they acknowledge slightly higher oil and a stronger Canadian dollar could impact their outlook, but they reserve judgment until they see it in the data,” said Greg Moore, senior currency strategist at Royal Bank of Canada, in an e-mail. “It implies a stronger currency would weaken their outlook on the economy.”

The loonie, named for the image of the aquatic bird on the C$1 coin, fell 0.2 percent to C$1.2459 at 5 p.m. in Toronto after trading at C$1.2492, the weakest level since April 15.

Canada’s benchmark 10-year government bond rallied, with yields falling four basis points, or 0.04 percentage points, to 1.67 percent. Canada’s 2.25 percent note maturing June 2025 added 34 cents to C$105.38.

“The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar,” policy makers led by Governor Stephen Poloz said in a statement. “If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.”

Oil Rebound

The Canadian dollar rose from a six month low in March to post the biggest three month rally among Group of 10 currencies against the U.S. dollar until about two weeks ago. It’s dropped since then as oil’s rebound slowed and Canadian economic data lagged behind that of the U.S., posting the biggest five-day drop since January last week.

In its April 15 monetary policy report, the central bank said the economy is responding to the stimulus it added to cushion Canada’s economy from the fall in oil, its largest export, and forecast faster growth later in the year.

Poloz has said the brunt of the oil shock will come in the first half of the year and anticipates “positives” including stronger U.S. demand for Canadian goods to be highlighted in the second half. A report Friday is expected to show Canada’s economy posted growth of 0.3 percent in the first quarter, according to the median estimate of 22 economists surveyed by Bloomberg. The bank forecasts economic growth this year will slow to 1.9 percent from 2.5 percent in 2014.

The Bank of Canada cut its benchmark rate in January to 0.75 percent to cushion the economy from the fall-out of the collapse in energy prices.

The decision to leave rates unchanged today was expected by all 23 economists surveyed by Bloomberg News.

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