Canada Dollar Drops Almost to Lowest in 3 Years on Rate Outlook

The Canadian dollar fell to almost the weakest level in three years with the Bank of Canada projected to keep interest rates low for more than a year as the Federal Reserve prepares to slow economic stimulus.

The currency tumbled to its lowest in almost four years against the euro as some of the world’s largest investors put money into European bonds, which are expected to gain next year amid losses in North American debt. The Bank of Canada won’t raise its benchmark interest rate until the second half of 2015 as it awaits stronger global growth to aid the country’s exports, according to a Bloomberg survey of 16 economists.

“The thought is that if the Fed is in a position to cut back a little bit on its quantitative easing, the next step would be an actual tightening or raising of short-term interest rates,” said Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce. “As short rates go up, money that flows around looking for a higher return would find the U.S. dollar to be more attractive, to the detriment of the Canadian dollar.”

The loonie, as Canada’s currency is known for the aquatic bird on the C$1 coin, fell 0.5 percent to C$1.0706 per U.S. dollar at 5 p.m. in Toronto and reached C$1.0719. It touched C$1.0738 on Dec. 20, the weakest level since May 2010. One loonie buys 93.41 U.S. cents.

The currency fell 0.7 percent this week against the U.S. dollar, and has dropped 0.9 percent this month, 3.7 percent this quarter and 7.3 percent this year.

‘On Fire’

Canada’s dollar declined as much as 1.6 percent to C$1.4818 per euro, the lowest since February 2010.

“The euro is on fire today,” said Brad Schruder, director of foreign exchange at Bank of Montreal, by phone from Toronto. “It could be a large money manager out of Europe that needs to rebalance, and in thinly traded markets you can see exaggerated moves.”

Yield forecasts for Spain and Italy, where borrowing costs soared to more than decade highs during the European debt crisis, indicate bond returns in 2014 will extend this year’s gains of as much as 11.1 percent, luring asset managers like Robeco Groep NV, Fidelity Investments and Amundi.

Yields on Spain’s 10-year bonds have plunged to 4.21 percent since surging to 7.75 percent in July 2012, the highest since 1996. They are forecast to end 2014 at 4.37 percent. Yields on Italian 10-year bonds, which dropped to 4.21 percent from a 14-year high of 7.48 percent in November 2011, are forecast to end 2014 at 4.28 percent.

Bonds Drop

Canada’s benchmark 10-year government bond fell today, with yields rising six basis points, or 0.06 percentage point, to 2.78 percent, the highest point in more than three months. The 1.5 percent security maturing in June 2023 lost 49 cents to C$89.49.

The losses are expected to continue next year, with the yield forecast to rise to 3.23 percent, according to the median estimate of 18 economists in a Bloomberg survey.

The benchmark U.S. 10-year note yield climbed to the highest level in two years, touching 3.02 percent, with a forecast to end 2014 at 3.38 percent.

The loonie declined despite gains in crude oil, Canada’s largest export. Futures on crude oil increased 0.6 percent to $100.13 per barrel and touched $100.75, a two-month high.

The 120-day correlation coefficient between the Canadian dollar and crude-oil futures fell to 0.12 today, the lowest since October 2007. The high this year is 0.47 on June 21. A reading of 1 indicates the measures move in lockstep, zero means no correlation at all.

Central Banks

Bank of Canada Governor Stephen Poloz said in a Dec. 17 interview that inflation has been lower than policy makers can explain, which helped lead him to surprise investors in October by dropping a bias to raise interest rates. The central bank’s policy rate is currently 1 percent.

The Fed said Dec. 18 it plans to cut monthly asset purchases in January to $75 billion from $85 billion. Policy makers will probably reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said in a Bloomberg survey on Dec. 19. The key borrowing rate has been zero to 0.25 percent since December 2008.

“The Canadian dollar lower against the U.S. dollar fits with the longer term,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “It’s European currencies that are outperforming.”

The loonie has declined 4.5 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index, while the U.S. dollar has risen 4 percent. The euro has added 8.8 percent to lead gainers, while the yen’s 16 percent drop paces decliners.

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