Canada Dollar Declines as Central Bank Maintains Rate, Language

By Joseph Ciolli - Sep 6, 2012 5:16 AM GMT+0800

 

The Canadian dollar fell against all but one of its 16 most-traded peers as the Bank of Canada reiterated that borrowing costs may need to rise to prevent inflation from accelerating while keeping its target interest rate unchanged.

The currency weakened for a second day against its U.S. counterpart as central-bank Governor Mark Carney said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” Canada’s dollar declined earlier amid speculation measures by the European Central Bank will fail to restore confidence in the region, slowing global demand for the nation’s exports.
“It’s pretty much the exact same old story by the Bank of Canada,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal (BMO), said in a telephone interview. “They left in the mild tightening bias, which everyone expected.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, depreciated 0.5 percent to 99.05 cents per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys $1.0096.
The country’s expansion will pick up through next year on business investment and consumer spending as shipments abroad lag behind on slower global growth, the Ottawa-based central bank said. The decision to remain at 1 percent, where the rate has been for two years, was forecast by all 27 economists surveyed by Bloomberg News.

Technical Analysis

The Canadian dollar may test a four-month high versus its U.S. peer that it has failed to breach three times in the past two weeks if central banks act to stimulate the global economy, according to Toronto-Dominion Bank (TD), citing technical indicators.

Canada’s currency yesterday touched 98.43 cents per U.S. dollar, which represents the top end of the currency’s recent range, after previously reaching that level on Aug. 21 and 28, Bloomberg data show. That’s the strongest since it reached 98.29 on May 3.

“It’s obviously quite a key support level” for the U.S. currency, Greg Moore, currency strategist at Toronto-Dominion’s TD Securities, said in a telephone interview. “If there are some fundamental changes out there, like quantitative easing or accommodative action announced from any of the major central banks, we could see a re-test of that level and a potential push below it.” Support refers to an area level where buy orders may be clustered.

The loonie failed to depreciate to 99.50 cents per U.S. dollar today although it broke a minor support point at 98.80, Moore said, after the Bank of Canada’s interest-rate decision.

ECB, Fed

The loonie briefly pared losses today as two central-bank officials briefed on the plan said ECB President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized -- that is, the same amount of money spent will be removed elsewhere from the system -- to assuage concerns about printing money. Policy makers will deliberate today and Draghi will announce the results at a press conference tomorrow.

Fed Chairman Ben S. Bernanke said on Aug. 31 at an annual forum in Jackson Hole, Wyoming, that he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.” The Fed has bought $2.3 trillion of assets in two rounds of the stimulus known as quantitative easing starting in 2008. Policy makers next meet on Sept. 12-13.

‘Hawkish Bias’

Canada’s economy remains “near its production potential” and prices for exported commodities have increased since July even with “slower global momentum,” the central bank said. The bank reiterated today exports won’t return to levels seen before the last recession until the start of 2014, citing in part the drag from the Canadian dollar’s “persistent strength.”

Carney has been saying since April that Canada has almost used up its spare economic capacity, and a report last week showed the economy expanded at a 1.8 percent annual pace in the second quarter, matching the central bank’s forecast.

“There wasn’t too much surprising from the statement -- that’s why we stayed in a consolidation pattern,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview. “Even if they do need to withdraw monetary policy, raising rates is not something that we expect to happen soon. They still have a hawkish bias.”

The central bank will raise the benchmark interest rate, currently at 1 percent, by 14.5 basis points, or 0.145 percentage point, over the next 12 months, according to a Credit Suisse Group AG index based on overnight swap rates. That’s up from 11 basis points on Aug. 30.

Quebec Election

Parti Quebecois, which seeks independence for the French- speaking province from Canada, won 54 of 125 electoral districts yesterday, according to final results posted on the Elections Quebec website. That gives PQ a minority mandate requiring it to get support from opposition parties to pass laws in Quebec.
The result means Pauline Marois, the first female premier of Quebec, probably won’t have a strong enough mandate to start the province toward another referendum on secession. Marois said last week it would be “very difficult” for her to advance the separatist agenda at the desired pace with a minority of seats. Her party captured 31.9 percent of the vote.

A Quebec separation would be “extremely economically damaging” for the province, Greg Anderson, the North American head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote yesterday in a note to clients.
The loonie has gained 2.8 percent this year in the largest advance among 10 developed-nation currencies monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has dropped 0.7 percent and the euro has fallen 3.7 percent to lead decliners.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net