Canadian Dollar Weakens With Inflation at Low End of Target Band

The Canadian dollar fell versus most of its 16 major peers as a government report showed inflation remained at the low end of the Bank of Canada’s target band.

The currency fluctuated against its U.S. counterpart as consumer prices increased 1.1 percent in September from a year earlier, Statistics Canada said today in Ottawa. That compared with a forecast for a 1 percent increase, according the median in a Bloomberg survey of 22 economists. The Bank of Canada, which is scheduled to make its next policy announcement Oct. 23, targets inflation at 1 to 3 percent. Speculation increased that the partial U.S. government shutdown ended yesterday curbed economic growth in Canada’s largest trading partner and may spur the Federal Reserve to keep buying bonds into next year.

“The economic landscape in the U.S and Canada is fraught with uncertainty, and the same concerns about growth in the U.S. have tainted the Canadian outlook,” said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto. “Inflation data continues to come in on the soft side, which gives the Bank of Canada cover to be more dovish.”

The loonie, as Canada’s dollar is known for the image of the waterfowl on the C$1 coin, was little changed at C$1.0286 per U.S. dollar at 5:02 p.m. in Toronto. One loonie buys 97.22 U.S. cents.

Bonds Rise

The nation’s benchmark 10-year government bonds rose, with yields down three basis points, or 0.03 percentage point, to 2.53 percent. The 1.5 percent securities maturing in June 2023 added 24 cents to C$91.28.

The core inflation rate, which excludes eight volatile products, matched August’s pace at 1.3 percent, the report showed.

Bank of Canada Governor Stephen Poloz said last week that growth has “disappointed” and the economy is operating below the level the Bank of Canada expected six months ago. The bank predicted in July that inflation will stay below its 2 percent target until the second quarter of 2015.

“September’s slightly weaker-than-expected core inflation reading is consistent with the increase in economic slack over the past year,” David Madani, an economist at Capital Economics Ltd. wrote in a note to clients. “With the Bank of Canada’s export-led recovery hopes likely to face even more delays, we expect underlying inflation to remain muted over the remainder of this year.”

Trade Pact

Canada and the European Union reached an “agreement in principle” on a free-trade treaty that brings near an end more than four years of negotiations. Canadian Prime Minister Stephen Harper and European Commission President Jose Barroso announced the agreement today following a meeting in Brussels.

The pact, which would need the approval of EU national governments and the European Parliament, will eliminate about 98 percent of all Canadian and EU tariff lines on the first day of its implementation.

Canadian investors are withdrawing the most cash from domestic fixed-income funds in three years, joining foreign counterparts exiting the country’s bond markets as rising interest rates cut returns.

Investors withdrew C$1.38 billion ($1.34 billion) from Canadian government and investment-grade funds in September, according to data from the Investment Funds Institute of Canada. The withdrawals were the largest since the mutual-fund group started keeping current records in May 2010. Statistics Canada said yesterday that foreigners sold C$1.22 billion of Canadian government debt in August, while buying a net C$2.03 billion of the nation’s corporate bonds.

The Canadian dollar has fallen 2.5 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar is down 6.2 percent, and the U.S. dollar has added 1.5 percent.

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