The Canadian dollar posted its biggest loss in a year against its U.S. peer as the nation’s annual inflation rate fell in April to its slowest in more than three years, bolstering the case for relaxing monetary policy.
Canada’s currency reached its lowest point in two months against the greenback as three U.S. policy makers called for the Federal Reserve to taper asset purchases that have devalued the currency. Canada’s dollar fell against the majority of its 16 most-traded peers before data May 22 forecast to show retail sales slowed. The slowest pace of inflation since October 2009 is sparking bets incoming Bank of Canada Governor Stephen Poloz may remove Mark Carney’s bias toward raising interest rates.
“It’s a strong argument for the Bank of Canada dropping any residual hawkish tilt and perhaps leading to a dovish bias,” Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, said yesterday in a phone interview. “That’s an important development in a world that is obsessed with currency wars and relative monetary policy.”
The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 1.8 percent to C$1.0281 per U.S. dollar in the past week in Toronto, the biggest drop since the week ending May 18, 2012. One loonie buys 97.27 U.S. cents.
Canada’s benchmark 10-year government bonds declined, with yields rising four basis points, or 0.04 percentage point, to 1.92 percent. The 1.5 percent security maturing in June 2023 dropped 30 cents to C$96.19.
Futures on crude oil, the country’s largest export, were little changed at $96.02 per barrel, after three weeks of gains. The Standard & Poor’s 500 Index (SPX) of U.S. stocks hit record highs, gaining 1 percent.
The loonie tumbled yesterday after Canada’s consumer price index rose 0.4 percent in April from a year ago, compared with a 1 percent annual gain the prior month, according to Statistics Canada. That’s the slowest since the country experienced a period of deflation at the end of the last recession.
All 24 economists in a Bloomberg survey forecast the central bank will keep the benchmark rate at 1 percent into next year. The Bank of Canada targets an inflation rate between 1 and 3 percent.
“If the inflation rate is not really an issue, who knows what the next move of the Bank of Canada will be?” Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., said yesterday by phone from Quebec City. “There will be a change in the leadership at the Bank of Canada, so we will see what will be the next move of the Bank of Canada. Is it upward or is it down? The question is open.”
Growth in Canadian retail sales slowed in March to 0.1 percent from 0.8 percent the previous month a report next week will show, according to the median estimate of a Bloomberg survey of 22 economists.
The cost to insure against declines in the loonie versus its U.S. counterpart reached its highest point in eight months. The three-month 25-delta risk reversal rate reached 1.7 percent, up from the low this year of 0.77 percent on Jan. 18 and the highest since Sept 3.
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 7.9 percent, the highest level since July 25. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Three Fed regional bank presidents called for phasing out the Fed’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.
“The currency market is reflecting that there’s uncertainty over how much longer the Fed will maintain its asset-purchase program,” said David Watt, chief economist at the Canadian unit of HSBC Holding Plc., by phone from Toronto. “There’s no story here that should suggest the Canadian dollar should outperform.”
The Canadian dollar declined 0.3 percent this week among 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Indexes. The dollars of fellow commodities exporters Australian and New Zealand lead decliners, down 1.6 percent and 1.5 percent. The U.S. dollar rose 1.7 to lead gainers.
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