Canadian Dollar Weakens With Nation’s Economic Tilt to Downside

  • Bank of Canada sees elevated risks of weak inflation, growth
  • Bets for interest-rate cut this year more than double to 19%

The Canadian dollar fell from a three-week high after the Bank of Canada said weak inflation and slower growth present a mounting threat to the nation’s economy, boosting bets for monetary easing.

The currency weakened against most of its major peers as BOC Governor Stephen Poloz said the country’s economic outlook has "tilted somewhat to the downside" since the previous policy meeting in July. The central bank held its benchmark rate at 0.5 percent for the ninth consecutive meeting, with the outcome anticipated by all 25 economists surveyed by Bloomberg.

“The Bank of Canada is worried about competitiveness,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. “They’d like to see the Canadian dollar weaker to boost exports so that they’re not a drag on growth.”

The Canadian dollar has lagged behind most major peers this quarter after a string of disappointing data, including the biggest gross-domestic-product contraction since 2009 in the second quarter, a shrinking jobs market and a widening trade deficit. While crude oil, the nation’s second largest export, has gained more than 20 percent this year, Wednesday’s increasing prospects for a Bank of Canada rate cut mirrors conditions in January when the loonie reached a 13-year low.

The currency fell 0.4 percent to C$1.2899 per U.S. dollar at 2:36 p.m. in Toronto, after reaching the strongest level since Aug. 19.

Hedge funds and other large speculators have been betting in the loonie’s favor since April, according to net-positioning data from the Commodity Futures Trading Commission. The loonie is projected to end the year weaker at C$1.31, according to forecasts compiled by Bloomberg.

Rates Watch

Bets for an interest-rate cut in Canada this year rose to 19 percent from 8 percent on Tuesday, according to options data compiled by Bloomberg. While the BOC has setting in motion market expectations for policy easing, there is a a 52 percent chance of a Federal Reserve hike this year, future show with the calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.

“The policy divergence theme has room to push USD/CAD higher over the course of the year,” said Ian Gordon, a foreign-exchange strategist at Bank of America Corp. in New York, who expects the Canadian dollar to weaken to C$1.34 against its U.S. peer by the end of 2016. “The market is underpricing the risks around the Canadian economy.”

Two of Canadian Prime Minister Justin Trudeau’s marquee budget policies -- enhanced child benefits and income tax cuts -- are doing little to boost consumer spending, according to a new Bloomberg-Nanos survey.

BOC policy makers signaled growth may not be as robust as previously forecast, saying Wednesday that even as recent strength in exports was encouraging, “the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July,” when it forecast the economy would expand at a 3.5 percent annualized pace this quarter and slowing to 2.8 percent in the fourth quarter.

“They are adopting a slightly more dovish stance than before,” said Bipan Rai, senior foreign-exchange and macro strategist in Toronto at Canadian Imperial Bank of Commerce, who sees the loonie weakening to C$1.34 to C$1.35 per U.S. dollar by the end of the year. “In the near term, we can expect the Canadian dollar to trade on the defensive side.”

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