Canada Dollar Falls Most Since May as BOC Cuts Growth Estimate

The Canadian dollar fell the most in eight months versus its U.S. counterpart after the Bank of Canada said the need for interest-rate increases was less urgent as it trimmed its economic-growth forecast.

The loonie, as Canada’s dollar is nicknamed, weakened beyond parity with the greenback for the first time since November after Governor Mark Carney said Jan. 23 the nation’s economy won’t reach full output until the second half of 2014. The currency declined for the third week against the euro as the European Central Bank said banks will return a greater amount of three-year loans than estimated, boosting short-term borrowing costs. Canada’s economy grew 0.2 percent in November from the previous month, according to a Bloomberg News survey of 18 economists, before a Statistics Canada report Jan. 31.

“I would attribute much of the Canadian dollar’s weakness this week to the change in guidance by the Bank of Canada, from tacitly hawkish to unambiguously dovish,” said Jack Spitz, managing director of foreign exchange trading at National Bank of Canada, by phone from Toronto.

The loonie fell 1.4 percent to C$1.0058 per U.S. dollar this week in Toronto, the largest decline since the five days ended May 18. It lost 2.5 percent to C$1.3541 per euro. One loonie buys 99.42 U.S. cents.

Price Swings

Implied volatility for three-month options on the U.S. dollar versus the loonie reached 6.7 percent yesterday, the most since Nov. 1. Implied volatility signals the expected pace of currency swings and is quoted by traders to set option prices.

Options traders became more bearish on the Canadian dollar. The three-month 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 at as high as 1.1 percentage point, the highest level since Nov. 15. It averaged 1.5 percentage points during the past 12 months.

Hedge funds and other large speculators decreased their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 57,952 on Jan. 22, compared with 68,668 a week earlier.

Inflation Data

The currency fell to an almost six-month low yesterday after a report showed Canadian 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 Bank of Canada has kept its policy interest rate at 1 percent since September 2010, the longest pause since the 1950s, while lowering this week the possibility of a rate increase. The bank cut its forecast for growth this year to 2 percent from an October forecast of 2.3 percent.

“The Canadian dollar was doing well until the Bank of Canada made its statement,” David Watt, chief economist at HSBC Holdings Inc., said in a telephone interview from Toronto.

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

Bonds Drop

The country’s benchmark 10-year bonds fell, with yields rising three basis points, or 0.03 percentage point, to 1.95 percent. The 2.75 percent security maturing in June 2022 fell 27 cents to C$106.84.

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 retail sales rose for a fifth straight month in November, led by record car purchases, Statistics Canada reported Jan. 22. Canada is the third-largest AAA-rated sovereign, behind Germany and Britain, and its unemployment rate dropped to a four-year low of 7.1 percent earlier this month.

In the long term, Canada will reap benefits from a rebound in commodities and fiscally conservative policies that have kept debt low, Matthew Eagan, a Boston-based money manager at Loomis Sayles & Co., which manages $186 billion including Canadian bonds and securities, said in an interview Jan. 23.

“What I like about Canada, long term, it’s got an economy that is, even though it’s North American-centric and tied at the hip to the U.S., they still have a lot of exposure to commodities,,” Egan said. “The other thing is their fiscal situation and their debt burden is just not even close to the problems we have here in the U.S. and other developed nations.”

The loonie will strengthen to 98 cents per U.S. dollar by the end of the March and 97 cents by the end of the year, according to the median estimate in a Bloomberg News survey of 45 analysts and strategists.

Before it's here, it's on the Bloomberg Terminal.