Canada Dollar Declines on Diverging Views From Central Banks

Canada’s dollar fell for the first time in six days as central-bank Governor Stephen Poloz warned of deflation after a rise in U.S. retail sales lifted bets the Federal Reserve will start trimming its bond-buying program.

The Canadian dollar declined versus most major peers as Poloz said policy makers had no view on the currency and were instead focused on preventing inflation from falling too low. It rose earlier to the highest point in two weeks versus its U.S. peer on gains in natural gas and crude oil, the nation’s largest export. Fed policy makers meet Dec. 17-18.

“In the currency war, Canada is a conscientious objector,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc. “U.S. retail sales was the key factor, it just basically bolstered the U.S. dollar as people are looking ahead to, ‘Is the Federal Reserve potentially going to taper next week?’”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.5 percent to C$1.0640 per U.S. dollar at 5 p.m. in Toronto. It earlier touched C$1.0561, the highest since Nov. 29. One loonie buys 93.99 U.S. cents.

Futures of crude oil were little changed at $97.44 per barrel in New York after adding as much as 0.8 percent. Natural gas for January jumped as much as 2.2 percent and touched the highest level in more than seven months.

The discount Canadian oil producers face for their crude compared to U.S. benchmarks was $27.85, almost the smallest since Sept. 13, according to data compiled by Bloomberg.

Bonds Fall

Canada’s benchmark 10-year government bond fell, with the yield gaining two basis points, or 0.02 percentage point, to 2.66 percent. The 1.5 percent security maturing in June 2023 dropped 15 cents to C$90.32 cents. The extra interest available in U.S. 10-year government bonds over their Canadian counterparts increased to 0.22 percentage point, the most since February 2011, diminishing the relative appeal of Canadian securities.

Ten-year yields will rise to 2.8 percent in the first quarter of 2014 and surpass 3 percent in the second half of the year, according to the median estimate of 19 economists surveyed by Bloomberg News from Dec. 6 to Dec. 11.

Poloz Speaks

Poloz reiterated the bank’s most recent projection that inflation will reach its target of 2 percent, a goal he called “sacrosanct,” in about two years, in the text of a speech he gave in Montreal.

“We don’t form a view on the dollar,” Poloz said when asked about the currency at a press conference following his speech. “Our focus is on inflation.” He added that many currencies rose against the U.S. dollar in response to the Fed’s monetary stimulus, and he expects that strength to reverse as the stimulus is wound down.

“While we’ve got comments from the Reserve Bank of New Zealand about being cautious about the kiwi dollar, while we had statements from the RBA about the Australian dollar, Canada -- given the opportunity to make a statement -- he seemed uncomfortable even have to deal with the issue,” HSBC’s Watt said. “It certainly shows we’re in a different space.”

The currency of Canada’s commodity-exporting peer Australia fell after central-bank Governor Glenn Stevens signaled a weaker local currency is preferable to lower interest rates to spur the economy, saying the Aussie’s natural level is probably closer to 85 U.S. cents than its current value, 89.37.

Kiwi, Greenback

New Zealand’s dollar rose after the central bank stepped up its inflation-fighting rhetoric and signaled it will start raising interest rates in the first half of next year. Reserve Bank of New Zealand Governor Graeme Wheeler said of the strength of the kiwi, which is overvalued by 30 percent, the most among major currencies versus the U.S. dollar, “the bank does not believe it is sustainable in the long run.”

The U.S. dollar gained against most of its as major peers as retail purchases climbed 0.7 percent, the most since June, after a 0.6 percent advance in October that was larger than previously reported, Commerce Department figures showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance.

The Fed will probably start reducing its $85 billion in monthly bond purchases at its next week’s meeting, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, up from 17 percent in a Nov. 8 poll.

‘Dollar Positive’

“Strong retail sales is consistent with an earlier taper, and that goes back to that U.S. dollar-positive story,” said David Tulk, chief macro-strategist at Toronto-Dominion Bank’s TD Securities unit, by phone from Toronto.

The cost to insure against declines in the loonie versus its U.S. counterpart touched the lowest in eight months, with the three-month 25-delta risk-reversal rate dropping to 0.95 percent. The average this year is 1.26 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

The loonie has declined 3.9 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar has lost 12.2 percent, while the U.S. currency is up 3.9 percent and New Zealand’s has gained 3.4 percent.

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