Canadian Dollar at Lowest in 3 Years on Rate-Cut Wagers

Canada’s dollar fell to the lowest in three years as central-bank Governor Stephen Poloz warned of low inflation, spurring bets the Bank of Canada will keep interest rates on hold as the Federal Reserve trims bond-buying.

The currency touched C$1.07 as it declined for a fourth day against its U.S. peer after a private report showed American companies boosted payrolls more than forecast in November. The data added to wagers the Federal Reserve will cut asset purchases as soon as this month, even as Poloz in Ottawa said in a statement “the substantial monetary policy stimulus currently in place remains appropriate” as he kept interest rates unchanged.

“The combination of both central banks and the data today is certainly something that would drive a weaker Canadian dollar,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto. “If we have a Fed that begins to taper earlier than what’s priced in -- because, right now with the bond-buying program, it’s U.S. dollar negative -- so if we have that pulled in, it turns increasingly U.S.-dollar positive.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, slipped 0.3 percent to C$1.0684 per U.S. dollar at 5 p.m. in Toronto. It reached C$1.0707, the lowest level since May 2010. One loonie buys 93.60 U.S. cents.

Bonds, Oil

Canada’s benchmark 10-year government bond fell, with yields rising six basis points, or 0.06 percentage point, to 2.65 percent. The 1.5 percent security maturing in June 2023 lost 50 cents to C$90.43.

Futures on crude oil, Canada’s biggest export, rose for the fourth straight day, touching $97.58 per barrel, its highest point since Oct. 30.

The cost to insure against declines in the loonie versus its U.S. counterpart fell the most since Nov. 18, with the three-month 25-delta risk-reversal rate dropping four basis points, or 0.04 percentage point, to 1.39 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Technical signals are building the Canadian dollar has fallen too far too fast against the greenback.

The loonie’s 14-day relative strength index against the greenback fell to 25.3, below the 30 threshold which may indicate the currency’s decline is losing momentum. It also traded below its lower 30-day Bollinger band, another technical indicator that signals prices may have fallen too far, too fast.

‘Household Imbalances’

Bank of Canada policy makers kept the benchmark rate on overnight loans between commercial banks at 1 percent, where it’s been for more than three years, as expected by all 22 economists in a Bloomberg News survey.

“The risks associated with elevated household imbalances have not materially changed, while the downside risks to inflation appear to be greater,” Poloz said in the statement, which didn’t mention the recent depreciation of the loonie.

The decision was Poloz’s first since he surprised investors in October by dropping language about the need to raise interest rates in the future. The world’s 11th largest economy won’t reach full capacity until around the end of 2015, the central bank forecasts, with Poloz counting on gains in investment and exports to drive growth, instead of debt-laden consumers.

Central Banks

“Their concerns are to the downside right now, rather than thinking about when they’re going to hike rates,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto. “You get the contrast with the Federal Reserve talking about tapering, the Bank of Canada still cautious and having shifted to park rather than neutral.”

The loonie fell earlier as companies in the U.S. boosted payrolls by 215,000 in November, according to figures from the ADP Research Institute in Roseland, New Jersey. The median forecast of 40 economists surveyed by Bloomberg called for a 170,000 advance. Official U.S. jobs data for November will be released Friday.

The U.S. dollar rose against most of its major peers after the news, as speculation increased the Fed will act to curb its $85 billion in monthly bond purchases as soon as its next meeting, Dec. 17-18.

“The Fed is seen scaling back policies before too long -- that contrasts with expectations that it’ll be a year or more before we see rate rise from Canada,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The weakness we’ve seen in the Canadian dollar reflects the divergent view.”

The Canadian dollar has declined 1 percent in the past week against nine developed market currencies tracked by the Bloomberg Correlation-Weighted Index, the biggest decline on the index. The New Zealand has seen the largest increase at 1.2 percent, while the greenback is up 0.1 percent.

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