Bloomberg News

Canadian Dollar to Fall as Disinflation Trumps Growth, BNP Says

December 24, 2013

Canadian Dollar Coins

The Canadian dollar is down 3.5 percent this year against nine developed nation peers tracked by the Bloomberg Correlation-Weighted Index. Photographer: Brent Lewin/Bloomberg

The Canadian dollar is poised to weaken as the Bank of Canada may ease monetary policy further to guard against disinflation, according to BNP Paribas SA.

While Canada’s dollar rose yesterday on an expansion in gross domestic product, the central bank’s emphasis will continue to be an inflation rate that has remained below its target band for the past two months, a team of analysts led by Steven Saywell, global head of foreign-exchange strategy at BNP in London, wrote in a note to clients. Investors should sell the currency on rallies below C$1.06 against the U.S. dollar.

“The central bank will remain predominantly focused on inflation rather than growth at the current juncture,” they wrote. “Further disinflation could prompt the BOC to consider easing policy further.”

The loonie, as the Canadian dollar is known for the image of the water fowl on the C$1 coin, fell 0.1 percent to C$1.0609 per U.S. dollar at 10:36 a.m. in Toronto. One loonie buys 94.26 U.S. cents.

The Canadian dollar tumbled to a three-year low of C$1.0738 on Dec. 20 after Statistics Canada reported the consumer price index rose 0.9 percent in November from a year ago, following a 0.7 percent rise the prior month. The central bank’s target band is 1 percent to 3 percent.

Poloz’s View

Bank of Canada Governor Stephen Poloz said in a Dec. 17 interview that inflation has been lower than policy makers can explain, which helped lead him to surprise investors in October by dropping a bias to raise interest rates. The central bank will probably keep its policy rate at 1 percent through next year, economists forecast, extending the longest such pause since the 1950s.

The currency climbed yesterday as Canada’s economic output rose 0.3 percent to an annualized C$1.60 trillion ($1.51 trillion). The gain was “consistent with the Bank of Canada forecast,” the BNP analysts wrote.

The Canadian dollar is down 3.5 percent this year against nine developed nation peers tracked by the Bloomberg Correlation-Weighted Index, while the U.S. dollar has gained 3.9 percent.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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


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