Canada Dollar Falls for 3rd Week on Diverging Central-Bank Views

Canada’s dollar fell for a third week as central-bank Governor Stephen Poloz’s signal that interest rates may stay lower longer contrasted with a Federal Reserve that may let borrowing costs rise by trimming its bond-buying.

The currency touched the lowest level in more than three years yesterday even after employment in Canada rose and the jobless rate remained at a five-year low. The Bank of Canada kept interest rates at 1 percent on Dec. 4 and warned the risks of inflation remaining below its target band had increased. Fed policy makers meet Dec. 17-18 after saying at their October gathering they may start slowing their $85 billion in monthly asset purchases “in coming months.”

“Inflation obviously is the problem -- it really is the central bank’s focus now,” said Dean Popplewell, head analyst at the online currency-trading firm Oanda Corp., by phone from Toronto. “The job number has done nothing to persuade the Bank of Canada from its neutral policy stance. The trend is for the loonie to experience further weakness.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.2 percent this week to C$1.0640 per U.S. dollar in Toronto. The currency touched C$1.0708, the least since May 2010. One loonie buys 93.99 U.S. cents.

Futures on crude oil, Canada’s biggest export, touched $98.07 per barrel in New York, the highest point since Oct. 29, and added 5.5 percent this week.

‘Overall Bearish’

Canada’s 10-year government bond fell, with yields rising 13 basis points, or 0.13 percentage point, to 2.69 percent, the biggest five-day increase since the week ended Sept. 6. Yields touched 2.73, the most since Sept. 20. The 1.5 percent security maturing in June 2023 dropped C$1.05 to C$90.13.

Yields on the benchmark bond traded 17 basis points lower than similar maturity U.S. securities after reaching 20 basis points on Nov. 28, the widest gap since February 2011.

The loonie’s 14-day relative strength index against the greenback was at 34 after reaching 25 yesterday, below the 30 threshold which may indicate the currency’s drop is losing momentum.

“The decline in the Canadian dollar has been too fast,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a phone interview. “I’m overall bearish on the CAD, we just need to see U.S. yields rise more. In the meantime, CAD will stay range-bound.” The loonie has traded between C$1.0611 and C$1.0708 this week.

Net Shorts

Futures traders’ bets the loonie will fall against the greenback rose to the highest since May, 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 Canadian dollar compared with those on a gain -- so-called net shorts -- was 41,583 on Dec. 3, the highest since the week ended May 14.

The decision to put rates on hold came after Poloz 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.

The share of economists predicting the Fed will taper bond purchases this month doubled, to 34 percent surveyed today by Bloomberg, an increase from 17 percent in a Nov. 8 survey. In November, 53 percent predicted a tapering in March, compared with 40 percent in today’s poll of 35 economists.

Triple Top

The loonie may reverse losses in coming sessions based on chart patterns, according to John Curran, senior vice president at Canadian Forex Ltd., an online foreign-exchange dealer.

“There is now a triple top at the C$1.0700-to-C$1.0710 area posted over the last three days, which is a significant technical signal,” Curran said in an e-mail. “To add to this, we already have an outside day today, meaning a higher high and lower low than the previous day. It is a strong indicator of a reversal in trend.”

The Canadian dollar has lost 4.2 percent this year against nine developed-market peers tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar rose 3.5 percent. The euro is the biggest gainer, up 8 percent, while the yen’s 14 percent drop paced decliners.

“The surge in interest in CAD seems to have been precipitated by the dovish turn from the BOC at its previous policy meeting,” Todd Elmer, a currency strategist in Singapore at Citigroup Inc., wrote in a report. “I take this as indication that many investors believe the recent move higher may be the leading edge of a major up move in dollar-CAD. This tends to argue for further CAD depreciation.”

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