Canada Dollar Weakens the Most Since 2008 as Economy Trails U.S.

Canada’s dollar posted its biggest decline in five years as accelerating economic growth in the U.S. convinced the Federal Reserve to slow monetary stimulus even as the Bank of Canada warned of deflationary risks.

The currency rose yesterday versus its U.S. counterpart to trim its annual drop to 6.6 percent. Canada’s dollar declined this year against 11 of 16 major peers as inflation dipped below 1 percent after central-bank Governor Stephen Poloz called a 2 percent goal “sacrosanct.” The currency fell against the greenback in eight of 12 months as the Fed begins reducing the bond-buying that has helped cap borrowing costs.

“Poloz would like our currency weaker, and for the most part he’s succeeded,” Blake Jespersen, managing director of foreign exchange at Bank of Montreal, said yesterday by phone from Toronto. “There’s a good chance, when we get back to normal, we may see some of this move retrace. The Canadian dollar does have more room to fall.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell to C$1.0654 per U.S. dollar in Toronto in the largest annual drop since an 18 percent plunge in 2008. It gained 2.9 percent in 2012. One loonie buys 94.14 U.S. cents.

The currency depreciated 3 percent in the fourth quarter and 0.1 percent in December.

Bonds, Oil

Canada’s benchmark 10-year government bond fell last year, with the yield rising 96 basis points, or 0.96 percentage point, to 2.76 percent and touching 2.83 percent, the highest since July 2011. It was the biggest increase since 1999. The 1.5 percent security maturing in June 2023 cost C$89.67.

Futures of crude oil, Canada’s largest export, rose 7.5 percent to $98.69 per barrel in New York and reached $112.24, the highest since May 2011. The Standard & Poor’s 500 Index of U.S. stocks rose 30 percent to a record 1,848.36 close.

Poloz surprised traders 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 3.3 percent versus the greenback since June 3, when Poloz succeeded Mark Carney as bank chief, underperforming all but five of 16 major currencies.

The central banker 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.

‘Weakness Resumes’

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. The U.S. is forecast to grow 2.6 percent next year after slowing to 1.7 percent in 2013.

“The message from Poloz -- which has been about a slower recovery, not quite as hawkish a view on the currency -- that’s allowed the Canadian dollar to lose 5 cents or more,” Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce, said by phone from Toronto. “It’s thought the Bank of Canada will be less in a hurry to raise interest rates and be less of an attractive commodity than the U.S. dollar.”

The Fed said Dec. 18 it will cut its monthly bond purchases to $75 billion next month, from $85 billion, citing “improvement in the outlook for labor market conditions.” The jobless rate fell to 7 percent in November, a five-year low and down from 10 percent in October 2009, as employers added a greater-than-forecast 203,000 workers to payrolls.

Loonie Forecasts

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.

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 fell 4.4 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index, while the U.S. dollar added 3.6 percent. The yen posted the biggest decline, at 16 percent, while the euro’s 8.6 percent advance led gainers.

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