Canadian Dollar Drops to 3-Year Low on Central-Bank Divergence

The Canadian dollar dropped for the fourth time in five weeks after the U.S. Federal Reserve began unwinding its unprecedented stimulus and the Bank of Canada signaled it was in no hurry to raise interest rates.

The currency fell to the lowest level in three years versus its U.S. peer after the Fed said it would reduce monthly asset purchases it uses to support the economy and cap borrowing costs. Canadian consumer prices held below the central bank’s target band for a second month after Governor Stephen Poloz warned of the risks of low inflation. Canadian economic growth slowed in October, a report is forecast to show next week.

“The inflation data definitely indicate the Bank of Canada is on the sidelines into 2015,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce, said by phone yesterday from Toronto. “Tapering was well-supported by the data, and now time will tell at which speed they continue the program. For dollar-Canada, we didn’t get as lasting a negative impact as we might have expected, given the gradual impact of tapering.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, weakened 0.5 percent to C$1.0635 this week in Toronto. It touched C$1.0738 yesterday, the lowest since May 2010. One loonie buys 94.03 U.S. cents.

Oil, Bonds

Futures of crude oil rose 2.8 percent to $99.32 per barrel in New York after touching $99.40, the highest since Oct. 22. The discount Canadian oil producers face for their crude compared to U.S. benchmarks narrowed to $23.50, the smallest since Aug. 16, according to data compiled by Bloomberg.

Canada’s benchmark 10-year government bond fell, with yields rising one basis points, or 0.01 percentage point, to 2.67 percent. The 1.5 percent security maturing in June 2023 fell 6 cents to C$90.30.

The consumer price index rose 0.9 percent in November from a year ago, following a 0.7 percent rise the prior month, Statistics Canada said from Ottawa yesterday. The rate has undershot the bank’s target band of 1 percent to 3 percent as exports slump and 2013 growth stagnated.

That came three days after Poloz told Bloomberg News inflation has been “lower than we can explain” while exports and investment have been disappointing. The Bank of Canada’s forecast is that the economy won’t reach full output until around the end of 2015.

Poloz Effect

Poloz surprised traders on Oct. 23 by dropping warnings the bank had maintained for more than a year that higher rates would “become appropriate,” causing a 0.9 percent plunge in the loonie that day. The currency has lost 3.4 percent versus the greenback since Poloz took over the Bank of Canada June 3, underperforming all but five of 16 major currencies.

“One of the transitions we need to see in the Canadian economy is a transition away from consumer growth into exports,” Catriona Martin, co-manager of Fidelity Investments’ C$8 billion Canadian Bond Fund, said in a Dec. 19 phone interview. “Does a weaker Canadian dollar help the export sector? Absolutely. Is the bank specifically going to target the currency? No.”

Canada’s gross domestic product rose at a 0.2 percent annualized pace in October, after a 0.3 percent gain the prior month, according to the median of a Bloomberg survey with 15 responses before the Dec. 23 release.

‘Rate Hikes’

The Canadian currency fell 0.9 percent on Dec. 18, the most since Oct. 23, after the Fed announced its decision to cut by $10 billion its $85 billion of monthly bond purchases starting in January.

The Federal Open Market Committee said in a statement it will taper “in further measured steps at future meetings” if the economy improves as forecast, with Chairman Ben S. Bernanke suggesting a cut of about $10 billion per gathering.

“The U.S. dollar rose pretty much across the board against all currencies as a result of the move, which means that dollars will be less plentiful in the future, and rate hikes are one step closer,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said on Dec. 18. “I continue to see dollar/CAD headed to C$1.09 in three to six months.”

Bearish bets on the loonie by hedge funds and other speculators rose to the most since the week of May 3, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 65,500 on Dec. 17, compared with net shorts of 57,514 a week earlier.

‘Temporary Respite’

The loonie pared weekly losses yesterday as traders bet faster-than-forecast economic expansion in the U.S., Canada’s largest trade partner, would also boost growth north of the border. U.S. gross domestic product climbed at a 4.1 percent annualized rate in the third quarter, up from a previous estimate of 3.6 percent, Commerce Department figures showed. A Bloomberg survey projected a 3.6 percent pace.

“In the medium-term, Canada is likely to benefit from stronger U.S. GDP,” Camilla Sutton, the Toronto-based head of currency strategy at Bank of Nova Scotia, said yesterday in a phone interview. “Our suspicion is we see a temporary respite in U.S. dollar-Canada up-move before it resumes in the New Year. It’s not as if we have a strong Canadian dollar, but we’re off the recent lows.”

The Canadian dollar has fallen 3.6 percent this year against nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, while the U.S. dollar added 4.1 percent. The euro climbed 8.3 percent to lead gainers, and the yen paced decliners with a 15 percent drop.

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