Canadian Dollar Declines as Inflation Rate Falls Short of Target

Canada’s dollar dropped versus most major peers as the nation’s consumer-price index fell below the central bank’s target, bolstering prospects policy makers will keep interest rates low.

The currency, called the loonie, touched the weakest in four months against the U.S. dollar before paring the loss as another report showed Canadian retail sales climbed more than three times what was forecast. Core inflation excluding more volatile categories came in at expectations. A technical indicator signaled the loonie may have fallen too much, too fast. It was still set for the biggest weekly loss against the greenback in a month.

“Core is basically in line with expectations and that’s enough to make them think the best direction for rates is to keep them on hold,” said David Tulk chief macros strategist at Toronto-Dominion Bank’s TD Securities unit by phone from Toronto. “Core is the operational guide for the bank and I think that’s close enough to their forecast that doesn’t provide them with enough of a reason to jump off at this point.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0514 per U.S. dollar at 5:00 p.m. in Toronto. It reached C$1.0569 earlier, the weakest level since July 9. One Canadian dollar buys 95.11 U.S. cents. The currency has dropped 0.7 percent this week, the most since the five days ended Oct. 25.

Implied volatility for one-month options on the U.S. dollar against its Canadian peer climbed to the highest level in two-months. It reached 6.42 percent, the most since Sept. 18. The measure is used to set option prices and gauge the expected pace of currency swings. The average this year is 6.47 percent.

Futures Positions

Futures traders increased their bets that the Canadian dollar will decline against its U.S. peer, 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 loonie versus those on a gain, known as net shorts, increased to 16,335 contracts on Nov. 19, from 16,092 a week earlier.

Canada’s government bonds rose for a second day, pushing yields on benchmark 10-year securities down five basis points, or 0.05 percentage point, to 2.57 percent. The price of the 1.5 percent debt due in June 2023 gained 39 cents to C$91.01.

The loonie trimmed its decline against the U.S. dollar as Statistics Canada reported that retail sales increased 1 percent to a record C$40.7 billion ($38.6 billion). The gain exceeded the forecasts of all 19 economists in a Bloomberg survey that estimated a 0.3 percent increase.

Consumer Prices

“We’re a little bit stronger than we were prior to the data’s release, so I think the focus has really been on the retail-sales figures, which were substantially above expectations,” said CIBC’s Enenajor. “Consumption is continuing to be a key factor in the Canadian economy.”

The seven-day relative-strength index for the Canadian dollar versus the greenback fell to 29.7, breaching the threshold of 30 that shows it may be due for a reversal.

Canada’s CPI declined to 0.7 percent in October from a year earlier, the nation’s statistics agency reported, lagging behind a Bloomberg survey’s forecast for 0.8 percent inflation rate. It was 1.1 percent in September. The core rate, which excludes eight volatile products, decelerated to 1.2 percent from 1.3 percent, matching economist forecasts.

“It could open the door to forward guidance of potential policy changes in the future, if inflation stays this low,” said Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, by phone from New York.

Rate Outlook

Bank of Canada Governor Stephen Poloz said last month the risk of inflation falling below policy makers’ 1 percent-to-3 percent target band led him to signal on Oct. 23 the next move in interest rates wouldn’t necessarily be higher. He dropped language about the need for higher rates that had been in every policy statement for more than a year.

The central bank has kept its benchmark rate at 1 percent since 2010 to support the economy. Policy makers will probably maintain the rate until the second quarter of 2015, according to the median estimate of 16 economists surveyed by Bloomberg between Nov. 8 and Nov. 13.

Canada’s dollar fell earlier along with the currencies of fellow commodity-exporting countries Australia and New Zealand against major peers after Reserve Bank of Australia Governor Glenn Stevens left open the possibility of intervention to stem Aussie-dollar strength.

The loonie has dropped 2.8 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar has fallen 9.7 percent, while the U.S. dollar has gained 3.7 percent.

“The bottom line is that everyone knows, and the bank also knows, inflation has been very weak, and likely won’t be at 2 percent this year or next year,” Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “So to see a number that’s that soft really just confirms inflation is well under wraps in Canada.”

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