Canada Dollar Weakens to Lowest Since 2010 Amid Rate Speculation

The Canadian dollar weakened beyond C$1.08 per U.S. dollar for the first time in more than three years after Bank of Canada Governor Stephen Poloz said he’s under no pressure to raise interest rates.

The currency fell versus most major peers after Poloz said while he has room to cut rates to prevent deflation, keeping them steady until data dictate otherwise is best. He spoke in an interview broadcast yesterday by the Canadian Broadcasting Corporation. The consumer price index has been below the bank’s 2 percent target for 19 months. Federal Reserve meeting minutes showed U.S. policy makers saw waning benefits to their stimulus, while data showed American company hiring climbed last month.

“It means the Canadian dollar is less attractive as an alternative investment destination,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “It may be this is feeding on itself a little bit as investors start to pull away from Canadian assets.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, sank as much as 0.6 percent to C$1.0830 per U.S. dollar, the weakest since May 2010, before trading at C$1.0820 at 5:00 p.m. in Toronto, down 0.5 percent. One Canadian dollar purchases 92.42 U.S. cents.

Futures of crude oil, Canada’s largest export, dropped as much as 1.5 percent to $92.26 a barrel in New York, the lowest level since Nov. 29.

Yields on Canada’s two-year government bond, those most closely tied to the exchange rate, were little changed at almost a two-week low of 1.1 percent. The securities’ yield advantage over comparable U.S. Treasuries shrank to 69 basis points, or 0.69 percentage point, the least since June 2012.

Bond Auction

Longer-term Canadian government bonds fell, pushing the yield on the benchmark 10-year security up four basis points to 2.72 percent. The 1.5 percent debt maturing in June 2023 dropped 31 cents to C$89.97.

The Bank of Canada auctioned C$2.7 billion ($2.5 billion) of three-year bonds, drawing an average yield of 1.365 percent. The 1.5 percent securities mature in February 2017.

The sale attracted $7.6 billion in bids, for a bid-to-cover ratio, a gauge of demand, of 2.82. The Dec. 11 three-year debt offering yielded 1.316 percent and had a coverage ratio of 2.72.

The Canadian dollar slid 1 percent yesterday, the most since June, after data showed Canada’s November trade deficit was nine times wider than forecast and the interview with Poloz was released. The central-bank chief reiterated he expects Canadian exports to fuel economic growth.

‘Rate Cut’

“One of the strongest consensus views for the year ahead is Canadian-dollar underperformance, and the market seems to have a particular appetite for bad news at the moment,” said Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, by telephone from London. “The market is now priced for at least some risk of a rate cut in the early part of the year.”

The trade gap was C$940 million. The nation’s consumer price index rose 0.9 percent in November from a year earlier, data showed on Dec. 20.

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. Poloz took office in June.

Odds the central bank will cut its 1 percent interest-rate target this year rose to 16 percent from 11 percent two months ago, according to Bloomberg calculations based on trading in overnight index swaps. The Bank of Canada has kept the key rate unchanged since September 2010, the longest since the 1950s.

Market Anticipation

“The market is looking forward to weak CPI numbers, and the Bank of Canada responding, as was hinted in the Poloz interview,” said Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, by phone from New York.

In the U.S., Canada’s biggest trade partner, the Fed is reducing monetary stimulus. It tapered monthly bond purchases to $75 billion in January, from $85 billion, under a decision announced after a policy meeting Dec. 17-18. Most policy makers forecast the benchmark interest rate would be maintained at virtually zero until 2015.

Minutes of the Fed meeting released today showed officials saw diminishing economic benefits from the bond buying program and expressed concern about risks to financial stability. Policy makers meet Jan. 28-29 to consider the next step in the strategy of gradually reducing bond buying as the economy strengthens. The minutes didn’t describe a set schedule for the pace of purchase reductions.

U.S. Jobs

U.S. companies added 238,000 workers in December, the ADP Research Institute in Roseland, New Jersey, reported today. Economists in a Bloomberg survey called for 200,000. The data preceded a Jan. 10 government report forecast to show U.S. nonfarm payrolls expanded by 195,000 jobs last month, versus 203,000 in November, and the unemployment rate held at a five-year low of 7 percent.

Canada created 14,100 jobs in December, compared with 21,600 the month before, another Bloomberg survey forecast before data that’s also due Jan. 10.

The loonie may reach the weakest level since 2009 against the U.S. dollar as it maintains a long-term decline, according to Royal Bank of Canada.

The currency’s close yesterday at C$1.0766 per U.S. dollar breached a key resistance level at C$1.0738, George Davis, chief technical analyst for foreign exchange, and strategist Paul Borean at RBC Capital Markets in Toronto said in a client note today. A closing above C$1.0853, its 2010 high, would open the way for the currency to slide toward C$1.0991, they wrote. That’s the weakest level since September 2009.

The Canadian dollar declined 5.9 percent in the past 12 months against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The yen had the biggest drop, losing 14 percent, while the U.S. dollar gained 4.2 percent.

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