Bloomberg News

Canada Dollar Drops as Carney Reduces Economic-Growth Forecast

April 17, 2013

The Canadian dollar weakened to the lowest level in a month versus its U.S. counterpart after the Bank of Canada reduced its growth forecast for 2013 and said economic slack will persist for more than two years.

The currency fell after the central bank lowered its 2013 growth forecast to 1.5 percent from the 2 percent it had predicted in January, after recent data in Canada, China and the U.S. trailed forecasts. Governor Mark Carney kept unchanged both his policy interest rate at 1 percent and his bias to tighten even as he lowered his growth forecast.

“Although the modest withdrawal aspect is left in the statement, the slashed growth and inflation forecasts leave plenty of room for Canadian dollar rates to price rate cuts down the line,” Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, said in an e-mail. “Broader issues like falling commodity prices” will propel the Canadian dollar lower, he said.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.6 percent to C$1.0265 per U.S. dollar at 5 p.m. in Toronto. The currency weakened to as low as C$1.0294, the least since March 13. One loonie buys 97.42 U.S. cents.

Bonds Rally

Canada’s benchmark 10-year government bonds rose, with yields dropping three basis points or 0.03 percentage point, to 1.71 percent, touching the lowest level since Dec. 10. The 1.5 percent security maturing in June 2023 closed 24 cents higher at C$98.06.

The Bank of Canada will announce additional details tomorrow about an April 24 auction of securities maturing in 2015.

The yield on December 2013 bankers’ acceptances, a measure of interest-rate expectations, fell to the lowest since March 21, the day the Canadian government announced its 2013 budget and the last time it pared its growth forecast. The yield on the notes fell to 1.22 percent.

So-called Bax contracts have settled an average of about 17 basis points above the central bank’s target rate since 1992, data compiled by Bloomberg show.

Carney’s reduced forecast follows the International Monetary Fund, which yesterday lowered its forecast to 1.5 percent from 2 percent and said Canada’s growth will be the slowest in the Group of 20 outside Europe.

Central Bank

“The members of the Bank of Canada have clearly followed the lead of many central bankers and the market as a whole in developing a more cautious stance on the pace of global growth in 2013,” Adrian Miller, director of fixed-income strategy at GMP Securities LLC, said in a note to clients. “The downward pressure on commodity prices that is likely to persist over the near term has resulted in a slight pause in growth expectations.”

Job data in Canada and the U.S., along with U.S. retail sales and first quarter gross domestic product growth in China have all come in below the median forecast in Bloomberg surveys of economists since the beginning of April.

Higher rates could trigger further gains in Canada’s dollar, which the central bank said is already hurting exports because of the dollar’s strength. The currency is also elevated because of haven flows and the impact of loose monetary policies elsewhere, the bank’s report said.

Rate Path

“They really want rates to be higher, but they’re constrained by the economic slack and the persistently high currency,” said Ed Devlin, head of Canadian portfolio management team at Pacific Investment Management Co., which runs the world’s largest bond fund. “When they have this tightening bias they’re speaking more to the average Canadian,” in an effort to curb consumer borrowing, than to participants in the currency and bond markets, he said. Devlin said he favors eight- to 12-year Canadian government bonds.

Foreign investors fleeing lower rates in the U.S. and Japan, where unprecedented monetary stimulus is depressing yields, have buffered the loonie’s drop this year. International investors in February bought C$5.25 billion of Canadian debt instruments, with a net C$8.01 billion purchase of bonds compared with sales of C$2.76 billion of money-market securities, Statistics Canada reported April 16.

The Canadian dollar had its biggest daily drop in more than a year on April 15, tumbling 1.2 percent as gold led a slide in commodities after China’s economic growth slowed more than forecast in the first quarter.

Gold futures, down 17 percent this year, fell to a two-year low of $1,321.50 an ounce yesterday on growing optimism that an economic recovery will curb demand for a protection of wealth. The metal slumped 13 percent in the two sessions through April 15, the most since January 1980.

Crude oil, the nation’s largest export, fell for the fourth time in five days, dropping as much as 3 percent to $86.06 a barrel in New York.

The Canadian dollar has declined 0.9 percent this year against nine other developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar rose 3 percent.

To contact the reporters on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net; Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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


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