Canada Dollar Falls After Consumer Price Data Match Forecast

Canada’s dollar fell after a government report showed inflation in June remained below the Bank of Canada’s 2 percent target.

The loonie, as the currency is nicknamed, weakened against a majority of its 16 most-traded peers as the consumer price index rose 1.2 percent in June from a year ago, matching the median forecast of 23 economists. The currency fell even as crude oil, the nation’s largest export, reached a 16-month high.

“The core figures were right on consensus, so there’s not too much reaction there,” said Greg T. Moore, a currency strategist at Toronto-Dominion Bank, referring to the CPI data. “It sort of fits with the broader theme this week of consolidation.”

The loonie climbed 0.1 percent to C$1.0368 per U.S. dollar at 5 p.m. in Toronto. It weakened 0.5 percent against South Africa’s rand and versus Sweden’s krona. One loonie buys 96.45 U.S. cents.

The currency is up 1.5 percent versus its U.S. counterpart this month. It has traded weaker than its 50-, 100- and 200-day moving averages against the greenback since June 19.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart was 7 percent, the lowest since May 16. Implied volatility, used to set option prices and gauge the expected pace of currency swings, reached a one-year high of 8.87 percent on June 24.

Futures Data

Hedge funds and other large speculators decreased their bets that the Canadian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 20,043 on July 16, compared with net shorts of 23,829 a week earlier.

Canadian government 10-year bonds rose, pushing yields down four basis points, or .04 percentage point, to 2.36 percent. The 1.5 percent security maturing in June 2023 climbed 33 cents to C$92.50.

Canada will auction C$3.3 billion ($3.2 billion) of notes due November 2015 on July 24.

The Bank of Canada has kept its key lending rate at 1 percent since September 2010. Governor Stephen Poloz inserted a line in his monetary-policy report released July 17 saying near-record low interest rates are appropriate “as long as” there is significant economic slack in the economy, low inflation and households continue to repair their balance sheets.

Economic Outlook

The central bank raised its economic growth forecast for this year July 17 to 1.8 percent from an April prediction of 1.5 percent, while lowering the 2014 projection to 2.7 percent from 2.8 percent. Both figures exceed Bloomberg consensus forecasts of 1.7 percent and 2.4 percent.

Futures on crude oil, Canada’s largest export, rose 0.4 percent to $108.46 per barrel in New York, after reaching the highest level since March 1, 2012.

“Oil prices seem to lose their beneficial impact on the Canadian dollar once prices surpass about $100 a barrel,” Toronto-Dominion’s Moore said. “The intuition there is that it becomes a drag on the economy. Lots of other parts of the economy rely on oil as an input.”

The June CPI compared with a 0.7 percent rate in May as inflation quickened for a second month in June as the prices of gasoline and automobiles rebounded. The core rate, which excludes eight volatile products, increased 1.3 percent after a 1.1 percent gain the prior month, Statistics Canada said today from Ottawa.

Price Stability

“In Canada, we don’t really have much of an inflation problem at all,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto before the release. “We have a disinflation problem where we’ve seen inflation fall well below the central bank’s target.”

The loonie lost 1.9 percent in the past 12 months against nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The yen fell 23 percent while the U.S. dollar is up 1.3 percent.

China, a major importer of commodities, announced it will remove the floor on lending rates offered by the nation’s financial institutions as economic growth slows and authorities push forward steps to give banks more freedom to set borrowing costs. The change, effective tomorrow, eliminates a limit set at 30 percent below the current 6 percent benchmark, according to a People’s Bank of China statement today.

The Australian and New Zealand dollars advanced after China, the largest trade partner for both South Pacific nations, announced the lending changes, while the loonie showed little reaction, Moore said.

“It was a bit of a knee-jerk reaction,” Toronto-Dominion’s Moore said. “It is stimulative at the margin, but it’s not the kind of stimulus that would lead to any sort of sustained market reaction in the risky currencies like the Canadian dollar.”

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