Bloomberg News

Canadian Dollar Snaps Four-Day Win Streak on Slower Inflation

January 23, 2012

Jan. 20 (Bloomberg) -- Canada’s dollar dropped versus its U.S. counterpart as a government report showed annual inflation slowed more than economists projected, weakening the argument for higher interest rates.

The Canadian currency’s first decline of the week pared its five-day advance to 1 percent against the greenback. It dropped against a majority of its most-traded counterparts on speculation the Bank of Canada will keep interest rates on hold for longer as the European sovereign-debt crisis unfolds.

“There is a perception out there that when you get external headwinds to growth, then there is the potential for them to” cut interest rates, said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc, in a telephone interview. “We don’t think they’ll do that, but they’re going to be on hold. Better U.S. data has been there, so that’s going to help the Canadian dollar, but it’s going to be choppy trading.”

The loonie, as the Canadian currency is also known, depreciated 0.2 percent to C$1.0132 per U.S. dollar at 5 p.m. Toronto time. One Canadian dollar buys 98.70 U.S. cents.

Implied volatility for one-month options on the Canadian dollar versus the greenback fell to as low as 8.13 percent today from 11 percent at year-end. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

‘Slow and Steady’

“We see slow and steady improvement through the year, which seemed difficult to foresee when implied volatility was over 11, but easier now that it’s close to 8,” David Watt, senior currency strategist in Toronto at Royal Bank of Canada’s RBC Capital Markets unit, wrote in an e-mail message.

The consumer price index fell 0.6 percent in December, compared with an advance of 0.1 percent in the previous month, Statistics Canada said today in Ottawa. The index rose 2.3 percent from a year earlier, compared with a 2.9 percent increase in the prior month. The median forecast of 23 economists in a Bloomberg News survey was for a 0.2 percent monthly drop and a 2.7 percent annualized increase.

“It was a below-consensus release on CPI on both the core and the headline,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia’s Scotia Capital, said by phone from Toronto. “That implies there is decreasing inflationary pressure in Canada and takes pressure off the Bank of Canada.” Sutton’s forecast is for the Canadian dollar to weaken to C$1.02 by the end of the first quarter.

Inflation View

The Bank of Canada raised its inflation forecast in a monetary report this week. Inflation will average 2.2 percent this quarter and 1.5 percent from April to June, faster than October forecasts of 1.9 percent and 1 percent, the Jan. 18 report said.

Governor Mark Carney kept his benchmark lending rate at 1 percent this week, prolonging the longest pause since the bank began using it as a policy measure in 1994. The economy will be hobbled by a European recession and slowing growth in China and the U.S., the central bank said.

Canadian government bonds fell for a third say, driving benchmark 10-year yields up six basis points, or 0.06 percentage point, to 2.06 percent. The 3.25 percent securities due in June 2021 dropped 49 cents to C$110.08.

A rally in Canadian junk bonds may spark a revival in sales of the debt after a two-month hiatus when Europe’s debt crisis led investors to avoid riskier assets.

Junk-Bond Gains

A recovery in risk appetite fueled a gain of 1.04 percent for non-investment grade debt this month, beating Canadian corporate, government and provincial bonds, according to Bank of America Merrill Lynch’s Canadian High-Yield Index. Western Energy Services Corp. priced the year’s first issue of high yield bonds today, increasing the sale to C$175 million ($173 million) from C$125 million.

Sales of high-yield bonds in Canada stalled in the second half as Europe’s crisis threatened to derail the global economic recovery, and profits on the debt evaporated. With European policy makers showing signs of making progress, demand for the debt is returning.

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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


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