Canada Dollar Falls to 2-Month Low as CPI Raises Rate-Cut Bets

The Canadian dollar declined to a two-month low versus its U.S. counterpart after the rate of inflation slowed in April to the least in more than three years, bolstering the case for relaxing monetary policy.

The dollar fell against most of its 16 most-traded peers after Statistics Canada said consumer prices rose 0.4 percent from a year ago, down from a 1 percent gain the prior month. The slowest pace of inflation since October 2009 is sparking speculation incoming Bank of Canada Governor Stephen Poloz may remove Mark Carney’s bias toward raising rates.

“If the inflation rate is not really an issue, who knows what the next move of the Bank of Canada will be?” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by phone from Quebec City. “There will be a change in the leadership at the Bank of Canada, so we will see what will be the next move of the Bank of Canada. Is it upward or is it down? The question is open.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, weakened 0.8 percent to C$1.0281 per U.S. dollar at 5 p.m. in Toronto. Earlier, it touched C$1.313, the least since March 8, and is down 1.9 percent on the week. One loonie buys 97.27 U.S. cents.

Bonds Fall

Canada’s benchmark 10-year government bonds fell, with yields rising four basis point, or 0.04 percentage point, to 1.92 percent. The 1.5 percent note maturing in June 2023 dropped 32 cents to C$96.20.

Canada will auction C$1.4 billion of 3.5 percent notes maturing in December 2045 on May 22.

Crude oil, Canada’s largest export, rose 0.8 percent to $95.93 after reaching $96.45, the highest since May 9. The Standard & Poor’s 500 Index of U.S. stocks added 1 percent.

Hedge funds and other large speculators decreased bets the Canadian dollar will fall against its U.S. peer, data from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the loonie compared with those on a gain -- so-called net shorts -- fell to 44,417 contracts as of May 14, compared with 51,916 the week before.

The CPI report is the last reading on inflation before Poloz takes office and gives him less scope to raise the key interest rate. Economists forecast the central bank will keep the benchmark rate at 1 percent into next year. The Bank of Canada targets an inflation rate between 1 and 3 percent.

Loonie Caution

“The change-over with the leadership at the Bank of Canada suggests one would want to be slightly more cautious in approaching the Canadian dollar,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto. “You’ve got a new central-bank governor, we don’t know much about him, we don’t know how he’s going to approach policy.”

The cost to insure against declines in the loonie versus its U.S. counterpart reached its highest point in eight months. The three-month 25-delta risk reversal rate reached 1.7 percent, up from the low this year of 0.77 percent on Jan. 18 and the highest since Sept 3.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart touched 7.9 percent, the highest level since July 25. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Better-than-forecast U.S. employment reports have raised speculation the Federal Reserve may cut short its monthly bond-buying program that has devalued the U.S. dollar.

‘Opposite Direction’

“It means loonie weakness because it means dollar strength,” Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, said in a phone interview. “You do have underlying dollar strength across the board as well, based on the view the U.S. is going in the opposite direction with ongoing discussions about when the Fed will start tapering its balance sheet, as highlighted by the Fed’s William’s yesterday.”

The Canadian dollar has declined 0.3 percent this week among 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Indexes. The dollars of fellow commodities exporters Australian and New Zealand lead decliners, down 1.6 percent and 1.5 percent. The U.S. dollar is up 1.7 to lead gainers.

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