Canada’s Dollar Weakens a Second Month Amid Stimulus Speculation

The Canadian dollar fell in the first back-to-back monthly losses since June amid speculation the U.S. Federal Reserve will reduce monetary stimulus before Bank of Canada policy makers do.

The currency sank versus 12 of its 16 most-traded peers as slowing inflation and signals from BOC Governor Stephen Poloz fueled bets the central bank, which next meets Dec. 4, will keep interest rates low as U.S. officials debate reducing stimulus. Goldman Sachs Group Inc. analysts said betting against the Canadian currency versus the U.S. dollar is a top trade recommendation for 2014. Oil, Canada’s biggest export, dropped.

“We started to see the investment community in general start to become a little bit more pessimistic or bearish on the Canadian dollar as we look forward to 2014,” George Davis, chief technical analyst for fixed-income and currency strategy in Toronto at Royal Bank of Canada, said in a phone interview. “That’s brought a little more attention to the downside risks for the loonie going forward.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, weakened 1.7 percent to C$1.0614 per U.S. dollar this month in Toronto in the biggest drop since August. It touched C$1.0629 yesterday, the weakest level since October 2011. The currency, which fell 0.9 percent this week, has lost 6.5 percent in 2013. One Canadian dollar buys 94.22 U.S. cents.

Canadian government bonds fell in November, pushing yields on benchmark 10-year debt up 13 basis points, or 0.13 percentage point, to 2.55 percent. The price of the 1.5 percent securities due in June 2023 dropped C$1 to C$91.18.

Appropriate Policy

Poloz told the Senate banking committee in Ottawa on Nov. 20 that the central bank’s current policy remains appropriate. The bank has kept its benchmark interest rate at 1 percent since 2010 to support the economy.

The BOC will keep the rate unchanged next week following its policy meeting, economists surveyed by Bloomberg forecast.

Poloz said last month the risk of inflation falling below policy makers’ 1- 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.

“We expect the BOC to hold rates at 1 percent, but it may choose to reinforce the easing bias despite the decent run of data,” UBS AG analysts led by Geoffrey Yu in London wrote Nov. 29 in a report.

Inflation Slows

The loonie fell last week after data on Nov. 22 showed the Canadian consumer price index rose 0.7 percent in October from a year earlier, lagging behind a Bloomberg survey’s forecast for a 0.8 percent inflation rate. It was 1.1 percent in September.

The currency was unable to sustain a brief gain it made yesterday after a report showed a bigger-than-forecast rise in third-quarter gross domestic product to an annualized pace of 2.7 percent.

Goldman Sachs in a note this week by analysts led by Thomas Stolper in London cited Canadian export weakness and said the BOC is one of the few central banks “with scope” to cut interest rates. The analysts forecast the Canadian dollar will weaken to C$1.14 in the next 12 months.

U.S. Labor Department data due Dec. 6 will show that employers in Canada’s biggest trade partner added 183,000 jobs in November and the unemployment rate fell to 7.2 percent, the lowest level since 2008, economists surveyed by Bloomberg forecast. U.S. payrolls expanded by 204,000 positions in October, after while the jobless rate rose to 7.3 percent.

Fed Bets

Speculation that improving U.S. economic data will lead the Fed to reduce stimulus as soon as December drove the greenback up against most of its major counterparts this month. The American central bank buys $85 billion bonds a month, pumping money into the economy while debasing the dollar.

Minutes of the Fed’s Oct. 29-30 policy meeting showed officials expected to reduce their stimulus program “in coming months” as the economy improves. U.S. policy makers next meet Dec. 17-18.

“Reported strength in October employment put the possibility of a December tapering back on the table, after a weak September employment report had taken it off,” Deutsche Bank Securities Inc. economist led by Joseph LaVorgna wrote Nov. 27 in a report.

Yields on U.S. Treasury 10-year notes have increased to 19 basis points more than comparable Canadian debt, versus 10 basis points less in January.

Crude Falls

Crude oil, Canada’s biggest export, fell for a third month, the longest losing streak since 2009.

West Texas Intermediate for January delivery declined 2.2 percent this week to $92.75 a barrel on the New York Mercantile Exchange. The commodity touched $91.77, the lowest since June, on Nov. 27.

“Crude oil prices are continuing to struggle,” RBC’s Davis said. “The rallies aren’t really gaining traction. That’s weighing on sentiment for the Canadian dollar.”

The Canadian currency has lost 3.6 percent this year against nine developed-market peers tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar is up 3.9 percent, while the Australian currency has fallen 10 percent.

Implied volatility for one-month options on the U.S. dollar against its Canadian peer climbed to the highest level since September. It reached 6.66 percent on Nov. 28, 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.

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