Canadian Dollar Falls as Central Bank Signals Slow Export Growth

The Canadian dollar touched the lowest level in more than a week after the Bank of Canada said its next move on interest rates could be up or down as a forecast pickup in business investment has been slow to materialize.

The currency fell against most of its major peers as the central bank held its benchmark interest rate at 1 percent for the 29th straight policy meeting, as forecast by all 18 economists in a Bloomberg News survey. The economy’s recovery “hinges critically” on a shift in demand from indebted consumers to exports and business investment, which will be aided by a weaker Canadian dollar and rising U.S. orders, the bank said as it lowered its growth forecasts for the year.

“The Bank of Canada statement was neutral, but I’d say it tilts towards the dovish, and I think a lower Canadian dollar is certainly an appropriate take from this statement,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc. “They are less confident about the export and business investment rotation they’ve talked about.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, depreciated as much as 0.5 percent to C$1.1034 per U.S. dollar, the weakest since April 4, before trading at C$1.1011 at 5:00 p.m. in Toronto, down 0.3 percent. One loonie buys 90.82 U.S. cents.

The Canadian dollar has been the worst-performing of the greenback’s 16 major peers this year as shifts in the Bank of Canada’s outlook prompted bets it would signal a need for easier monetary policy to spur inflation and boost exports.

Growth Outlook

Bank of Canada Governor Stephen Poloz said he was maintaining his “neutral” view on the direction of the key policy rate despite raising the bank’s inflation forecasts for the year because the pickup in consumer prices was only transitory.

Asked in a press conference following the rate decision if he was shutting the door on lowering his policy interest rate, Poloz said, “No, we are neutral, and that means rate cuts can not be taken off the table at this stage.”

Gross domestic product will expand 2.3 percent this year, the bank said, down from a January forecast of 2.5 percent, on a reduced contribution by business investment. The 2015 growth outlook remained at 2.5 percent, and today’s Monetary Policy Report gave the first estimate of 2016 growth at 2.2 percent. The economy will reach its full capacity over the next two years, the bank forecast.

The bank’s forecast assumes the currency will stay in its recent trading range around 91 U.S. cents.

Inflation Projection

“There’s mention of a 91 cent level as being an area where the bank believes dollar/CAD will remain anchored,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “I suspect that’s why you’re seeing dollar/CAD hang around this C$1.10 level, which is the equivalent of 91 cents.”

The bank moved up its projection of when inflation will return to its 2 percent target to the first quarter of 2015 from the last three months. The core inflation rate won’t reach 2 percent until the start of 2016.

While energy costs are rising and a weaker currency is boosting prices of imported goods, policy makers are focusing on the “subdued” rate of core inflation that excludes volatile items, the bank said.

Inflation has been below the Bank of Canada’s 2 percent target for 22 straight months, registering 1.1 percent on an annualized basis in February.

“He certainly did highlight that they have not ruled out the possibility of rate cuts in Canada and spent a lot of time talking about inflation,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “We have a Bank of Canada that’s neutral, we have one that’s very focused on the Canadian dollar at current levels.”

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