Canada Dollar Rises for Second Day as Traders Pare Bearish Bets

The Canadian dollar rose for a second day as hedge funds and other speculative investors pared bets on a decline versus its U.S. peer.

Canada’s currency was still headed for the largest yearly decline against the greenback in five years as the U.S. Federal Reserve was set to allow borrowing costs rise when it begins reducing bond-buying in January. The currency is down 7.1 percent versus the greenback this year, the biggest annual decline since 2008, while dropping 3.1 percent in the fourth quarter and 0.2 percent this month.

“It’s a nice rebound,” Blake Jespersen, managing director of foreign exchange at Bank of Montreal, said by phone from Toronto. “It’s dangerous to be too bearish on the Canadian dollar. Certainly, when the entire market is so bearish, you have to think that move has been priced in.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.2 percent to C$1.0631 per U.S. dollar at 1:17 p.m. in Toronto after gaining 0.5 percent yesterday, the most on a closing basis since Sept. 18. One loonie buys 94.07 U.S. cents.

Canada’s benchmark 10-year government bond yield rose to 2.79 percent, the highest since Sept. 18, before adding two basis points, or 0.02 percentage point, to 2.76 percent. The 1.5 percent security maturing in June 2023 lost 14 cents to C$89.66.

Futures of crude oil, Canada’s largest export, fell 0.6 percent to $98.65 per barrel. The Standard & Poor’s 500 Index of U.S. stocks rose 0.3 percent.

‘Dovish Stance’

Bearish bets against the currency by hedge funds and other speculators fell from the highest since the week of May 3 last week, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline compared with those on a gain -- net shorts -- was 58,432 on Dec. 24, compared with 65,500 a week earlier.

Bank of Canada Governor Stephen Poloz surprised traders on Oct. 23 by dropping warnings the bank had maintained for more than a year that higher interest 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 on June 3, succeeding Mark Carney who went to the Bank of England, underperforming all but five of 16 major currencies.

“Poloz would like our currency weaker, and for the most part he’s succeeded,” BMO’s Jespersen said. “If growth and inflation pick up, that would force the Bank of Canada to move off their dovish stance.”

Inflation Rate

Poloz has said he’s worried about inflation persistently below the Bank of Canada’s target band. In a Dec. 17 interview with Bloomberg News, Poloz said inflation has been “lower than we can explain” while exports and investment have been disappointing.

The Fed said Dec. 18 it will cut its monthly bond purchases to $75 billion next month, from $85 billion. According to the median forecast of 41 economists surveyed by Bloomberg on Dec. 19, the central bank will pare its purchases by $10 billion in each of the next seven meetings before ending the program in December 2014

Both the Fed and the Bank of Canada are forecast to keep benchmark short-term interest rates unchanged through the second half of 2015, according to Bloomberg economist surveys.

Canada’s consumer price index rose 0.9 percent in November from a year ago following a 0.7 percent rise the prior month. The Bank of Canada targets inflation at 1 percent to 3 percent.

The economy is forecast to expand by 2.3 percent in 2014, according to the median estimate of 29 economist surveyed by Bloomberg. Growth is expected to have stagnated at 1.7 percent in 2013.

Loonie Forecasts

The Canadian dollar will underperform in the first half of 2014 before recouping losses to the end the year at C$1.06, according to Camilla Sutton, head of currency strategy at Bank of Nova Scotia.

“We expect near-term weakness in the Canadian dollar, to be followed by a mid-year stabilization,” Sutton wrote in a note to clients.

The loonie will weaken to C$1.09 by the end of 2014, according to the median estimate of economists in a Bloomberg survey.

Canada’s legal tender is down 4.4 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index, while the U.S. dollar added 3.3 percent. The yen has posted the biggest decline, a 16.7 percent drop, while the euro’s 8.4 percent advance leads gainers.

Before it's here, it's on the Bloomberg Terminal.