Canada Dollar Falls to 6-Month Low as CPI Drop Exceeds

The Canadian dollar fell to the lowest level against its U.S. peer in almost six months after a report showed consumer prices declined more than forecast last month as growth cools in the world’s 11th largest economy.

The currency dropped for a third day against the greenback and the majority of its most-traded peers as Canada’s inflation rate declined 0.6 percent in December, compared with a 0.2 percent drop forecast in a Bloomberg News survey. The Bank of Canada trimmed its growth forecasts for the year and said interest rate increases were less urgent on Jan. 23.

“We expected the numbers to be soft, but they fell even lower than expected,” said David Watt, chief economist at the Canadian unit in Toronto of HSBC Holdings Plc. “Canadian inflation is lingering near the lower part of the Bank of Canada target band and that provides more confirmation that Bank of Canada will not be raising interest rates anytime soon.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to C$1.0058 per U.S. dollar at 5:04 p.m. in Toronto, after touching the weakest level since July 27. One loonie buys 99.42 cents.

The Canadian dollar posted the biggest decline versus its peers this week, with a 1.7 percent drop in the Bloomberg Correlation-Weighted Indexes, which tracks the currencies of 10-developed nations. The euro has gained 1 percent and the greenback has dropped 0.2 percent.

Price Swings

The loonie’s 14-day relative strength index against the U.S. dollar reached 26.1, below the 30 level that some traders see as sign that an asset may be about to reverse direction.

Futures for crude oil, Canada’s largest export, fell 0.1 percent to $96.03 per barrel and the Standard & Poor’s 500 Index rose 0.5 percent.

The country’s benchmark 10-year bonds fell, with yields rising six basis points, or 0.06 percentage point, to 1.95 percent. The 2.75 percent security maturing in June 2022 lost 52 cents to C$106.83.

The Bank of Canada will auction C$2.9 billion ($2.87 billion) of 10-year notes maturing June 2023 with a 1.5 percent coupon on Jan. 30.

Canadian Finance Minister Jim Flaherty said today the country’s currency will continue to face pressure to appreciate.

“The pressure on the Canadian dollar is going to be on the upside over time,” Flaherty said in an interview with BNN Television from Davos, Switzerland. “I’m not terribly concerned about the Canadian dollar.”

Price Changes

Canada’s annual inflation rate held at a three-year low of 0.8 percent in December, keeping it below the bottom of the central bank’s target band, as food and shelter costs moderated. The core CPI, which excludes eight volatile products, slowed to 1.1 percent from a year earlier from 1.2 percent, the slowest since February 2011.

“Inflation was much, much lower than expected,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “Given that we’re an inflation-targeting central bank, there’s very little reason to be looking to push rates up. It kind of suggests, as they indicated, low for longer is the trend.”

Options traders are the most bearish on the Canadian dollar in two months. 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 1.1 percentage point, the most since Nov. 15. It averaged 1.5 percentage points during the past 12 months.

“Dollar-Canada is searching for a new range,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada by phone from Toronto. “Canada has been held up in the past on the inference the Bank of Canada would be the first out of the G-7 block to raise rates. Governor Mark Carney put an end to that speculation.”