Canada Dollar Touches One-Week High on BOC Language

Canada’s dollar touched the strongest level in more than a week after the country’s central bank removed the word “neutral” from its policy statement, fueling bets officials are more open to raising interest rates.

The currency fluctuated at almost a five-year low as crude oil, the nation’s biggest export, dropped. The Bank of Canada left the benchmark interest rate unchanged at 1 percent, as forecast by all 24 economists surveyed by Bloomberg.

“What we see is a statement that is less dovish than we anticipated,” Bipan Rai, director of foreign-exchange strategy at CIBC World Markets Inc., said by phone from Toronto. “The removal of the word neutral, I think that caught many in the market a bit off guard.”

The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, gained as much as 0.3 percent to C$1.1184 per U.S. dollar, the strongest since Oct. 13, before trading at C$1.1236 at 5 p.m. Toronto time, down 0.1 percent. It reached C$1.1385 on Oct. 15, the weakest since July 2009. One loonie buys 88.01 U.S. cents.

Yields on the Canadian government’s benchmark 10-year bond were little changed at 1.96 percent after increasing earlier to 1.99 percent, the highest level in more than a week. The price of the 2.5 percent security maturing in June 2024 was C$104.71.

Crude Falls

West Texas Intermediate crude oil fell to $80.42 a barrel in New York, the lowest level in more than two years on a closing basis, after an Energy Information Administration report showed that U.S. inventories increased more than forecast last week.

“Oil is the most highly predictive factor right now, and so people are watching it closely,” Greg Anderson, head of global foreign-exchange strategy in New York at Bank of Montreal, said in an e-mail message. “The U.S. inventories data has triggered a big reversal in oil today.”

The Bank of Canada “judges that the risks to its inflation projection are roughly balanced,” policy makers led by Governor Stephen Poloz said in a statement from Ottawa after a meeting.

The central bank dropped a line used in its last decision on Sept. 3 that said it “remains neutral with respect to the next change to the policy rate.” Policy makers have kept the benchmark interest rate target unchanged since September 2010.

Currency ‘Overreaction’

“It’s certainly an overreaction in the Canadian-dollar-positive way to a statement that was wholly the same,” said Greg T. Moore, senior currency strategist at Royal Bank of Canada, by phone from Toronto. “In general, no real large material change.”

Poloz said later in another statement the bank is stopping the use of “forward guidance” on the future path of interest rates for now. A press conference was canceled after shots were fired near Parliament.

The BOC chief is probably another year away from a rate increase that would end the longest such pause since the 1950s, economists predict, with the central bank relying on a revival in exports and business investment to eat up slack in the world’s 11th-largest economy.

The Bank of Canada also revised higher the forecasts for core inflation in its quarterly monetary policy report. The bank now estimates core inflation, which excludes volatile items like food and energy, will reach 2.1 percent this quarter, versus a July projection for 1.8 percent. It was 2.1 percent last month.

Headline inflation will slow to an average of 1.4 percent in the second quarter of 2015, the bank said, compared with a July forecast for 1.7 percent. It was 2 percent in September.

Costlier Imports

A weaker currency increases inflation by making imported goods more expensive. Lower gasoline prices from falling oil aren’t reflected in core inflation data.

“The market had gone into it thinking the bank would be more dovish in terms of just sounding more concerned about the downside risks of inflation,” said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, by phone. “It pushed higher core inflation, which reflects higher imported inflation from the weaker currency.”

The loonie weakened earlier as much as 0.6 percent after Statistics Canada reported the nation’s retail sales fell 0.3 percent, the most this year, to C$42.4 billion ($37.8 billion). Economists surveyed by Bloomberg News had forecast no change.

The August reading followed a 0.1 percent decline in July, the first back-to-back losses in retail sales since 2012.

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