Why Carney Proves Different From Other Central Bankers With Listing Loonie
Falling unemployment, faster growth than in the U.S. and a shrinking deficit drove Canada’s dollar to the highest in more than three years against the greenback on April 29 as traders anticipated Carney would join central bankers from Europe to China in boosting rates. Instead the 46-year-old former Goldman Sachs Group Inc. managing director kept interest rates unchanged today, downplay inflation and highlighting risks to the Canadian economy from a strong currency.
Since then, the so-called loonie has dropped against 14 of its 16 most-traded counterparts, falling 2.8 percent against the Swiss franc and 4.8 percent versus New Zealand’s dollar. Bank of America Merrill Lynch forecasts the currency will fall 10 percent through 2012 against the greenback. Canadian-dollar bulls outnumber bears by the narrowest margin this year according to Commodity Futures Trading Commission data.
“All of the fundamentals that one would traditionally look at scream out for a rate hike,” said Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management, which oversees about C$250 billion ($257 billion). “The reason the market is so cautious on the prospect of rate hikes is the Canadian dollar is still quite strong and the Bank of Canada is expressing a lot of concern about it.”
The loonie, named for the aquatic bird on the dollar coin, is heading for its first monthly loss since January, dropping 2.4 percent to 96.79 cents versus the U.S. dollar at 10:03 a.m. in New York today. It reached 94.46 cents on April 29, the strongest since the record 90.58 cents in November 2007.
Carney joined the Bank of Canada in 2003 and became governor in 2008. Before that, the Harvard University- and University of Oxford-educated economist spent 13 years with Goldman Sachs in London, Tokyo, New York and Toronto.
The central banker, named by Time magazine as one of the 100 most influential people in 2010, steered Canada’s economy out of the recession caused by the financial crisis faster than Group of Seven peers by slashing interest rates to 0.25 percent, the lowest ever, ensuring banks were adequately capitalized and backstopping the residential mortgage system.
The currency’s “persistent strength” poses a threat to the economy and issues driving inflation higher may be transitory, Carney, who met with policy makers to set rates, said today.
Carney said in a separate speech on May 16 the U.S., which buys 73 percent of Canada’s exports, and other developed countries “will be weighed down by the legacy of the crisis,” and will require years to repair household, bank and government balance sheets, which may cut demand for Canadian products.
The bank declined a request by Bloomberg News for an interview with Carney because it’s in a blackout period before today’s rate announcement, spokeswoman Dale Alexander said.
First-quarter gross domestic product expanded at a 3.9 percent annual rate, the statistics agency said yesterday, trailing the 4 percent median forecast in a Bloomberg survey.
Economists expect Canadian output to grow by 2.9 percent this year, compared with 2.7 percent in the U.S., according to Bloomberg-compiled median forecasts. The U.S. economy grew at a 1.8 percent annual rate last quarter, less than forecast.
Employers added a net 58,300 positions in April, almost triple the median forecast, and the jobless rate unexpectedly fell to 7.6 percent, Statistics Canada said on May 6.
Finance Minister Jim Flaherty said May 25 he aims to eliminate Canada’s deficit in the fiscal year that begins April 2014, a year earlier than previously planned. Prime Minister Stephen Harper vowed to fulfill his pledge to cut corporate taxes and spending after the Conservative Party won the first majority in the Ottawa-based House of Commons in seven years earlier this month,.
The central bank raised its policy rate to 0.5 percent last June from a record low 0.25 percent, the first in the G7 to raise borrowing costs since July 2008. Carney has held the rate at 1 percent since September.
Analysts have increased estimates on the loonie versus the dollar by 3 percent this year, according to the median of 29 forecasts compiled by Bloomberg, to 98 cents.
“We attribute most of the pullback in the Canadian dollar not to the state of the Canadian economy but with the broader global correction that is going on and European concerns,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The prospects for the Canadian currency look much better because inflation figures have picked up and the economy is still showing a reasonable degree of momentum.”
Wells Fargo, the most-accurate currency forecaster for two consecutive quarters, according to Bloomberg rankings, has the strongest outlook for the Canadian dollar, seeing the loonie at 90 cents per U.S. dollar by year-end. Investors may be underestimating the potential for rate rises, Bennenbroek said.
Temporary increases in sales taxes and energy are driving the consumer price index above the central bank’s 1 percent to 3 percent target, Carney said in the May 16 speech. Underlying inflation is “relatively subdued” and should return to the 2 percent target by the middle of 2012, he said.
‘Starting to Impinge’
The core rate, which excludes eight volatile items such as gasoline, slowed to 1.6 percent in April compared with a year earlier, from March’s 1.7 percent advance, Statistics Canada said on May 20.
“I don’t think inflation is a primary concern for the bank at the moment,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto. “On the other hand, the Canadian dollar is relatively strong. It’s starting to impinge more on domestic businesses.”
Exports may be curbed by the weak U.S. recovery. Canadian retail sales were little changed in March, compared with a median forecast for a 0.9 percent rise. Wholesale sales rose 0.1 percent, trailing the 1.2 percent median forecast.
The odds of a September rate rise fell to below 20 percent yesterday, from more than 50 percent the week before Carney’s speech, according to data on overnight index swap rates compiled by Bloomberg. Odds are now about 10 percent in favor of a rise at the July meeting and about 50 percent for October, the data show.
The European Central Bank raised rates in April for the first time in almost three years, bringing the benchmark repo rate to 1.25 percent. The People’s Bank of China boosted borrowing costs four times since mid-October as inflation accelerates at the fastest pace in six years.
Canada’s central bankers “aren’t pulling the trigger on that near-term rate signal,” said RBC’s Lascelles. “And so the market is constantly back-pedaling.”
The loonie is 20 percent overvalued, the most in the Group of 10 after the Australian dollar, according to Bank of America Merrill Lynch, which predicts the Canadian currency will depreciate 5 percent against the greenback by year-end to $1.03 on its way to $1.07 by the end of 2012.
Futures traders betting the Canadian dollar will rise against the greenback outnumbered those betting it will fall by 21,277 on May 27, the least since December.
Lascelles says Carney risks waiting too long to raise rates.
“You do risk falling well behind the curve here if you don’t get moving relatively quickly,” he said. “We’re continuing to chomp our way through slack,” he said, meaning excess capacity in the economy.
“In a year, chances are there’s not going to be a whole lot of slack left,” Lascelles said. “If you still have a policy rate that’s no higher than 1 percent, or at best 1.5 percent, that probably isn’t enough.”
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