Canada Dollar Falls as Central Bank Forecast to Hold 1%

The Canadian dollar traded at almost the lowest level this year against its U.S. counterpart as the Bank of Canada is projected to maintain its benchmark interest rate at one percent in a decision tomorrow.

The currency weakened versus the majority of its most-traded peers after a report showed Canadian retail sales slowed in November. Canada’s dollar fell against the yen, trimming a gain this month, after the Bank of Japan said it will conduct open-ended asset purchases starting in 2014, later than estimated.

“We’re a long way from getting back to normal interest rates,” said Aaron Fennell, a futures specialist at Bank of Nova Scotia’s ScotiaMcLeod unit, by phone from Toronto. “If they do start raising rates in Canada, they’re going to do so very cautiously, 25 basis points at a time. They’ll probably do it two times and then lay off for a while to see what happens.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, rose 0.1 percent to 99.19 cents per U.S. dollar at 5 p.m. in Toronto, after falling to 99.46. It reached 99.47 on Jan. 18, the lowest level since Dec. 31. One loonie buys $1.0082.

It fell 0.9 percent to 89.43 per yen, paring a 2.3 percent gain this month.

Options Data

Options traders became more bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded as high as 0.92 percentage point, the most since Nov. 27. It averaged 1.5 percentage points during the past 12 months.

Futures of crude oil, Canada’s biggest export, rose 0.7 percent to $96.24 per barrel and the Standard & Poor’s 500 stock Index rose 0.4 percent.

Canada’s benchmark 10-year bonds rose, pushing the yield down two basis points, or 0.02 percentage point, to 1.91 percent. The 2.75 percent note maturing in June 2022 added 19 cents to C$107.16.

The Bank of Canada will announce further details on Jan. 24 for a Jan. 30 10-year note auction.

The central bank will keep the benchmark interest rate at one percent when it announces its policy decision at 10 a.m. tomorrow, according to the median forecast of 24 economists in a Bloomberg survey. The Bank of Canada has kept its policy interest rate at 1 percent since September 2010, the longest pause since the 1950s, and has said since April that borrowing costs may rise.

Economic Data

Retail sales rose 0.2 percent to C$39.4 billion ($39.7 billion) after October’s gain was revised down to 0.5, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast that retail sales would be unchanged from the previous month, according to the median of 23 forecasts. Retail sales less autos fell 0.3 percent, from a projected gain of 0.1 percent in a survey of 19 economists.

“I think for retail sales it was kind of a mixed report in the sense that there were revisions to the October report and so the upward surprise on headline was counterbalanced by a downward surprise less autos, which was all counterbalanced by what happened to the previous month’s revisions,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “So the market might have been a bit confused by retail sales.”

Yen Trade

The Bank of Japan said it will conduct open-ended asset purchases of 13 trillion yen a month starting next year and set a 2 percent inflation target in a bid to weaken its currency and end two decades of stagnation, disappointing investors who had expected more immediate action to drive down the currency.

“There’s been so much yen weakness over the last two months or so, I think it was natural to see some profit-taking after the Bank of Japan announcement,” said Elsa Lignos, senior currency strategist at Royal Bank of Canada, by phone from London. Investors are “beginning to question whether the Bank of Japan can really do enough to weaken the yen.”

Japan’s five-year note yield fell to 0.15 percent, the lowest level since the government started selling the debt in February 2000.

The loonie has fallen 1.7 percent during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 6 percent while the greenback has dropped 4.6 percent.

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