Bloomberg News

Canada Dollar Weakens as Central Bank Trims Outlook, Holds Rate

October 25, 2011

Oct. 25 (Bloomberg) -- Canada’s dollar weakened the most this month versus its U.S. counterpart after the Bank of Canada cut its economic growth outlook and removed a reference to withdrawing stimulus as the global economy slows.

The country’s economy may take longer to return to its capacity level as a debt crisis triggers a “brief” European recession and slow U.S. growth reduces demand for exports, the Ottawa-based central bank said in a statement. The loonie, as the currency is nicknamed, strengthened beyond parity with its U.S. counterpart for the first time in a month before falling after a European Union finance ministers meeting was cancelled.

“Canada dollar is hanging on to the weakness,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Now that we have the Bank of Canada out of the way, it’s just trading off of global themes. The key focus is Europe right now.”

Canada’s currency fell as much as 1.8 percent to C$1.0213 per U.S. dollar, the most since Sept. 22, and traded at 1.0167 at 5 p.m. in Toronto. It rose as much as 0.5 percent, reaching beyond parity for the first time since Sept. 21. One Canadian dollar buys 98.36 U.S. cents.

The Bank of Canada held its policy interest rate at 1 percent and said slow U.S. growth will hurt consumer and business confidence. The rate action was forecast by all 27 economists surveyed by Bloomberg News.

Inflation will also be slower than earlier forecast, falling to as low as 1 percent next year, it said.

Central Banking

“Obviously, the bank is citing more slowdowns and erring on the cautionary side,” said John Curran, senior vice president at the online foreign exchange dealer CanadianForex Ltd. in a telephone interview. “They’re looking for slower growth. The market had been anticipating a bit more positive sentiment on the economic outlook and that didn’t happen. That’s why the Canadian dollar is falling.”

Shorter-term government bonds rose, driving yields on benchmark two-year debt 11 basis points lower to 0.99 percent. Yields reached a record low 0.76 percent on Sept. 12. One basis point is 0.01 percentage point.

Canada will provide details of its three-year bond offering on Oct. 27. The auction is scheduled for Nov. 2.

The loonie traded through par with the greenback earlier as European officials worked to forge a plan that contains the region’s debt crisis. Summits of the 27 European Union leaders and 17 leaders of the euro area will take place tomorrow in Brussels as scheduled, EU President Herman Van Rompuy’s office said. A separate meeting of EU finance ministers was canceled.

Euro Watch

“We need to see whether the ring fence is going to be high enough to keep European Union stresses contained,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit, by phone from Toronto, referring to what’s happening in Europe. “Parity may be a little rich for the Canadian dollar in this environment.”

Watt forecast the currency to end the year at C$1.04.

Canadian Finance Minister Jim Flaherty said the private- sector economists he met with today project continued modest economic growth, and told him a recession is out of the question for now.

Speaking to reporters after the meeting in Ottawa, Flaherty said it would take a “dramatic shock” in Europe, such as a banking crisis with a credit crisis that followed, to push Canada back into recession.

The Bank of Canada has held the overnight rate at 1 percent since September last year, after raising it from a record low 0.25 percent in June of that year.

Carney’s Plan

In a Bloomberg survey of 21 economists earlier this month, 19 predicted the central bank’s governor Mark Carney will keep interest rates unchanged at 1 percent through the year, with two predicting a cut. Interest rates will likely remain unchanged until the third quarter of next year, when Carney will begin raising borrowing costs again, according to the survey’s median estimate.

Futures markets showed traders are reducing bets that the Bank of Canada will increase interest rates by the first quarter next year. Yields on the March 2012 bankers’ acceptances contract, a proxy for short-term borrowing expectations, dropped eight basis points to 1.11 percent.

The central bank will release its monetary policy report tomorrow, updating its forecasts for the country’s economy that were last revised July 20.

Retail sales increased 0.5 percent in August to a seasonally adjusted C$37.8 billion ($37.8 billion) compared with July, Statistics Canada said in Ottawa. Economists surveyed by Bloomberg News predicted a 0.3 percent gain, according to the median of 22 responses.

The loonie has weakened 1.9 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has declined 2.8 percent, and the yen has lost 2.3 percent of its value.

--With assistance from Allison Bennett in New York and Theophilos Argitis in Ottawa. Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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