Pimco Joins Chorus for Bank of Canada Rate Cut as Loonie Tumbles

  • Parade of weaker-than-forecast economic data adds to pressure
  • Traders pricing in higher chance of a third rate cut next year

Pacific Investment Management Co., one of the world’s largest investors, joined a growing chorus in the financial markets saying the Bank of Canada may need to cut interest rates with the nation’s economy still struggling to recover from collapsing oil prices.

The Canadian dollar reached C$1.40 per U.S. dollar for the first time since 2004 Friday after wholesale trade unexpectedly contracted in October and core consumer prices rose less last month than economists forecast, continuing a run of worse-than-forecast economic data. Crude oil, until this year Canada’s biggest export, fell to a six-year low.

Prices for Canadian oil near a 2008 low means the central bank is more likely to cut rates, Ed Devlin, who manages the Canadian investments among the $1.5 trillion that Pimco oversees, said in a blog post Friday. The market seems to agree, with odds of a rate cut as early as next month rising.

"We’re still working through this oil-price shock, and quite frankly oil prices dropping even further is not helpful," Devlin said in a phone interview from New York."They’re more inclined to cut than to hike."

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell as much as 0.5 percent to C$1.4001 per U.S. dollar. It dropped 0.1 percent to C$1.3957 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 71.65 U.S. cents.

Currency Swings

The currency has tumbled about 17 percent versus the the greenback this year, the worst performance since 2008. It is forecast to strengthen to C$1.33 by the end of 2016, according to the median estimate in a Bloomberg survey of analysts.

The most bearish among the forecasts, however, from Macquarie Group Ltd., Morgan Stanley and Bank of America Merrill Lynch, see the currency falling to C$1.45 per U.S. dollar next year as the market prices in growing odds of a cut.

"There is obviously concern the Canadian economy is still declining," said Shaun Osborne, chief foreign-exchange strategist in Toronto at Bank of Nova Scotia. "That may require some additional attention from the Bank of Canada. That’s going to be a big concern from markets running into the January policy announcement."

Canada will report October gross domestic product numbers on Dec. 23 after data for the previous month showed an unexpected economic contraction. The economy has contracted during the first two quarters of 2015.

Trading in overnight index swaps suggest a 13 percent chance the central bank will use its January policy meeting to cut interest rates 0.25 percentage point to 0.25 percent -- the record low set during the last recession. The likelihood of a cut by the end of next year is nearly 70 percent after two cuts during 2015.

"I don’t think the Bank of Canada will be able to keep their rosy glasses much longer," Thomas Costerg, a senior economist at Standard Chartered Bank in New York, said in an e-mail. "The data is weakening day after day, and that data still refers to before the recent leg down in commodity prices, which implies further downside risks in the data."

Costerg said he expects an interest-rate cut during the first three months of next year.

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