Canada Dollar at 3-Year Low on Rate-Cut Bets as Trade Gap Swells

The Canadian dollar sank to a three-year low as the nation’s November trade deficit swelled to nine times what economists forecast, adding to speculation the central bank might cut interest rates.

The currency slid the most in six months against its U.S. counterpart and fell versus all of its 16 major peers. Bank of Governor Stephen Poloz said that while he has room to adjust rates if needed, keeping them steady until economic data dictate otherwise is the best course. The U.S. trade gap shrank to a four-year low as imports of oil, Canada’s largest export, dropped to the lowest level in three years.

“This is Poloz saying, ‘we’re not saying we’re going to lower rates, but maybe,’” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC, by phone from New York. “You’re seeing what it means for the currency. It’s getting destroyed.”

The loonie, as Canada’s currency is known for the image of the waterfowl on the C$1 coin, depreciated 1 percent to C$1.0766 per U.S. dollar at 5 p.m. in Toronto. It lost as much as 1.2 percent, the biggest intraday drop since June, to touch C$1.0781, the weakest since May 2010. One Canadian dollar buys 92.89 U.S. cents.

“Adjusting rates is always a tool,” Poloz said in an interview being broadcast today on the Canadian Broadcasting Corporation. “We have some room to maneuver, unlike other central banks, but we have to consider in the broader context what impact it would have.”

Odds Rising

The chances of a rate cut from the Bank of Canada are rising, and the risk of lower rates hasn’t been adequately priced in by the market, Evan Brown, a currency strategist at Morgan Stanley in New York, wrote today in a research report.

The bank’s Jan. 22 meeting could see a bias for lower rates inserted into policy language to set up a rate cut in the first half of 2014 as the dangers of low inflation mount and poor productivity and discounted crude-oil exports mean Canada benefits less from U.S. growth than in the past, Brown wrote. He said investors should buy the U.S. dollar at C$1.0750 and bet it will reach C$1.12.

Canada’s benchmark 10-year government bond rose for a second day, pushing the yield down three basis points, or 0.03 percentage point, to 2.68 percent, the lowest level since Dec. 23. The price of the 1.5 percent security maturing in June 2023 added 27 cents to C$90.28.

Trade Gaps

The nation’s merchandise trade deficit widened to C$940 million ($879 million) from a C$908 million deficit in October that was revised from a C$75 million surplus in a report today from Ottawa. The median estimate of economist surveyed by Bloomberg called for a C$100 million deficit in November.

The U.S. trade gap narrowed 12.9 percent to $34.3 billion, smaller than projected by any economist surveyed by Bloomberg and the least since October 2009, figures from the Commerce Department showed today in Washington. America is Canada’s biggest trade partner.

“You need to get your exports going to support economic activity because domestic demand is not living up to expectations,” GMP’s Miller said.

The loonie extended losses earlier as Canada’s Ivey purchasing-manager index fell to 46.3 in December on a seasonally adjusted basis, following a November reading of 53.7, according to a statement on the website of Western University’s business school. Economists in a Bloomberg survey forecast an advance to 54.5. Readings of more than 50 indicate purchasing by governments and companies advanced.

Poloz said in an interview last month exports have been disappointing through a period when the Canadian dollar weakened and the U.S. economy accelerated.

Language Dropped

In his October policy statement, Poloz dropped language that had been put in place by his predecessor about the need for a future rate increase.

The loonie declined yesterday after Finance Minister Jim Flaherty said in an interview broadcast Jan. 5 that a weaker currency helps the country’s manufacturers and that Poloz had told policy makers the loonie could weaken.

“It’s tacit acceptance by the Bank of Canada as well as the finance minister with respect to a weaker Canadian dollar to offset the terms of trade,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “The competitive devaluation model, which has been adopted by other central banks globally -- Canada can now be added to the list.”

The Canadian dollar fell the most today among 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Index, sliding 0.9 percent. The U.S. dollar rose 0.3 percent.

“It just underlines the fact that the bank is mindful of wanting to encourage a degree of competitiveness via the currency,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, by phone from London. “You look at the two trade reports, the U.S. and Canada, and one disappointed and the other was a positive surprise.”

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