Canada Dollar at Weakest Since September

Canada’s dollar slid to the weakest level since September before data tomorrow forecast to show the consumer-price index fell below policy makers’ target, boosting the case for the central bank to keep interest rates on hold.

The currency fell versus most major counterparts after Bank of Canada Governor Stephen Poloz reiterated to lawmakers yesterday that low rates will remain appropriate until the economy shows more signs it’s gaining momentum. The central bank surprised investors after its last policy meeting by saying the next rate move won’t necessarily be higher, citing the risks of slowing inflation.

“Our team’s perspective on the Canadian dollar is now negative because the Canadian central bank is taking that position, that they’re going to keep rates low for a very long time,” Aaron Fennell, a futures specialist at Scotiabank’s ScotiaMcLeod unit, said by phone from Toronto.

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, depreciated 0.6 percent to C$1.0517 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0526, matching the weakest level since Sept. 4. One Canadian dollar buys 95.08 U.S. cents.

Canada’s government bonds rose, pushing the yield on the benchmark 10-year bond down one basis point, or 0.01 percentage point, to 2.62 percent. Earlier the yield increased three basis points to 2.66 percent, the highest level since Oct. 16. The price of the 1.5 percent security maturing in June 2023 gained 10 cents to C$90.63.

Volatility Rises

Implied volatility for one-month options on the U.S. dollar against its Canadian counterpart climbed to a six-week high. It reached 6.21 percent, the most since Oct. 10. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.47 percent.

The Canadian currency extended losses after data showed fewer Americans than forecast filed applications for jobless benefits last week, adding to bets the Federal Reserve is moving closer to reducing the stimulus that has fueled risk appetite worldwide. Claims dropped by 21,000 to 323,000, the lowest level in almost two months, the Labor Department reported. Economists surveyed by Bloomberg called for a decrease to 335,000.

Minutes released yesterday of the Fed’s October meeting showed officials said they might cut bond purchases “in coming months” if the economy improves as anticipated. The U.S. central bank buys $85 billion of bonds each month to push down long-term yields and boost growth. The purchases tend to debase the greenback as they spur appetite for higher-yielding assets.

Oil Climbs

The loonie dropped today even as futures on crude oil, Canada’s biggest export, rose as much as 2.5 percent to $95.63 a barrel in New York, the highest level since Nov. 1.

Canadian consumer prices rose 0.8 percent in October from a year earlier, trailing a 1.1 percent gain the previous month, a Bloomberg survey forecast before tomorrow’s report. The Bank of Canada’s inflation target is a band of 1 percent to 3 percent.

“You’re always interested in CPI, given that it’s the most direct impact on central-bank policy,” said Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce, by phone from Toronto. “Certainly a 0.8 or 0.9 is bottom-end and normally the time when banks start to ease conditions.”

The central bank has held its benchmark overnight interest-rate target at 1 percent since 2010 to support the economy. Poloz’s policy statement last month dropped language about the need to raise the rate.

‘Significant Slack’

“The bank judged on Oct. 23 that the substantial monetary policy stimulus in place remained appropriate and decided to maintain the target for the overnight rate at 1 percent,” Poloz told the Senate banking committee in Ottawa yesterday. “Since then, while some new data points have been released, our outlook remains roughly the same.”

He reiterated that “significant slack” remains in the economy and growth is being held back by sluggish business investment and exports. Policy makers next meet on Dec. 4.

“In the context of what Poloz is saying about inflation, I think the Canadian dollar is going to be sensitive to weaker numbers,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “It should be negative for the Canadian dollar.”

Stronger-than-forecast economic reports are making investors cautious to wager that policy makers will maintain the position.

Canada’s two-year government bond yields reached the most in a month over U.S. peers as data point to accelerating economic growth, prompting investors to hold off making bearish bets on Bank of Canada interest rates.

Rate Gap

The Canadian two-year debt yielded 85 basis points more than similar U.S. Treasuries yesterday, the most since Oct. 22, the day before the central bank’s last statement. The spread, which narrowed to 78 basis points after the decision, has since widened as data on Canadian employment, economic growth and housing topped forecasts. The gap was 84 basis points today.

The UBS Growth Surprise Index for Canada rose to a record 195 on Nov. 15 after a report showed Canadian factory sales advanced to the most in more than a year in September. The Citigroup Economic Surprise Index for Canada is at 55.6, the highest since June. The Organization for Economic Cooperation and Development said this week Canada will probably raise rates at the end of next year to avoid a buildup of inflation.

The loonie has lost 2.6 percent in 2013 against nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has gained 3.9 percent.

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