Canada’s Dollar at Almost Three-Year Low Amid Bets on Fed Impact

The Canadian dollar traded at almost the lowest level in three years amid speculation it will weaken against its U.S. counterpart as the Federal Reserve prepares to reduce stimulus.

The currency fell against the majority of its 16 most-traded peers before a two-day Fed meeting begins tomorrow to consider changes to its $85 billion-a-month bond-purchase program that depressed borrowing costs to help jump start an economic recovery. The purchases have tended to devalue the U.S. dollar. Existing home sales fell for a second month in November, adding to evidence the market has begun to cool.

Under Governor Stephen Poloz, the Bank of Canada has shifted its focus to the risk of low inflation amid a stalling economic recovery, spurring bets it will keep rates on hold as the Fed trims bond-buying. The policy statements of predecessor Mark Carney included warnings that higher rates would “become appropriate” to deter consumers from racking up debt.

“While the Fed is talking about lessening the amount of stimulus, Poloz has indicated there’s uncertainty and that’s affected the perception of the Canadian dollar so when risk sentiment is positive the Canadian dollar is still going to lag because of the policy orientation of the two central banks in general,” David Watt, chief economist at the Canadian unit of HSBC Holding Plc said by phone from Toronto.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0596 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 94.38 U.S. cents. It touched C$1.0684 on Dec. 4, the lowest closing since May 2010, after the Bank of Canada left interest rates unchanged and warned of low inflation.

Bond Trades

Canada’s government bonds traded little changed, with the benchmark 10-year security yielding 2.67 percent. The 1.5 percent securities maturing in June 2023 traded at C$90.26.

Poloz said last week he’s weighing the risk of a housing market correction against the threat of deflation. Existing home sales fell 0.1 percent in November from the previous month, the Canadian Real Estate Association said in a statement. The number of homes sold fell 3.2 percent in October, which was the biggest drop in a year.

Poloz’s remarks Dec. 12 in Montreal “reinforced concern over the lack of domestic inflationary pressure and the recent shift to a neutral policy bias,” George Davis, chief technical analyst for foreign exchange at RBC Capital Markets, said in a Dec. 13 note to clients.

Inflation in the world’s 11th largest economy has slowed to 0.7 percent, below the 1 percent to 3 percent target band, and the bank said Dec. 4 that “downside risks to inflation appear to be greater” than before. The bank’s key interest rate has been at 1 percent since September 2010 and will probably remain there through next year according to a Bloomberg survey of economists.

Inflation Level

Canadian consumer prices rose 1 percent in November from a year earlier, topping the 0.7 percent increase in October, economists in a Bloomberg survey forecast before the government issues the data on Dec. 20.

Total net foreign buying of Canadian securities was C$4.41 billion in October, the fourth straight addition, Statistics Canada said today from Ottawa. Demand for corporate debt led a C$6.12 billion purchase of bonds and international investors bought C$4.45 billion of stocks.

Futures traders increased their bets that the Canadian dollar will decline against the U.S. dollar, 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, known as net shorts, was 57,514 on Dec. 10, the most since May 3, compared with net shorts of 41,583 on Dec. 6.

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