Photographer: Brent Lewin/Bloomberg

Loonie Weakens as Poloz Pledge of Caution Leaves Bulls Reeling

  • Short-term yields drop as confidence in rate-hike bets fades
  • Currency is still among world’s strongest this quarter

The loonie fell and short-term government debt gained as Bank of Canada Governor Stephen Poloz’s comment that the bank will proceed “cautiously” after raising rates twice this year surprised investors who saw another hike as imminent.

The currency weakened to an almost four-week low, paring its advance this quarter to 4.1 percent against the greenback, which still leaves it among the strongest of the major currencies tracked by Bloomberg. Yields on Canada’s two-year sovereign debt fell from a six-year high as confidence in an October rate boost sank.

The Canadian dollar’s rally since early May is fading as investors pare bets on tightening after the central bank increased rates for the first time since 2010 in July and followed that with a hike this month. Wednesday’s reaction is reminiscent of previous occasions when Poloz whipsawed traders who were anticipating a different tone. The market was braced for turbulence: Volatility on loonie overnight options reached close to the highest level of the year before the governor spoke.

“The Canadian dollar is getting squeezed by lower short-term rates, reflecting the dovish undertone of the Poloz comments,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. “Bank of Canada officials are pushing back against market complaints about communication, but market participants might have preferred a little more insight into policy thinking ahead of the September rate hike and a little less right now."

The Canadian dollar was down 0.9 percent to C$1.2457 per greenback at 2:24 p.m. in Toronto. The yields on two-year Canadian obligations fell three basis points to 1.58 percent. One-week implied volatility has traded above its 50-, 100- and 200-day averages every day this month.

Poloz said there’s no “predetermined path for interest rates,” and said the central bank will proceed “cautiously” as it assesses the economy.

“Tightening from the Bank of Canada will be a gradual affair from here, with our estimate being that the next move will have a 2018 time stamp,” Nick Exarhos, an economist at Canadian Imperial Bank of Commerce, wrote in a note. This is “bearish for the Canadian dollar, which we see weakening by a few more cents by the end of this year, and bullish for the front end of the Canadian curve.”

— With assistance by Robert Fullem

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