The Canadian dollar fell to parity against its U.S. counterpart after the Bank of Canada said the need to raise interest rates is less urgent as the economy will take longer to reach full output.
The currency dropped to a two-month low as the central bank led by Governor Mark Carney pared its forecast for economic growth this year to 2% from an October prediction of 2.3%. It weakened against 15 of its 16 most-traded peers after the bank held its benchmark interest rate at one percent, matching the predictions of 27 economists surveyed by Bloomberg.
“The market was sort of side swiped by the dovish tone of Governor Carney,” said Dean Popplewell, head analyst at the online currency-trading firm Oanda Corp. in Toronto. “There are Canadian dollar buyers at parity but I think the market will start questioning how strong they will be at this current level. If we do break through parity, than the Canadian dollar certainly does have room to underperform a wee-bit more.”
The Canadian dollar, known as the loonie for the image of the aquatic bird on the C$1 coin, fell 0.7% to 99.92 cents per U.S. dollar at 2:23 p.m. in Toronto. It touched the weakest level since Nov. 19. One loonie buys $1.0008.
The currency weakened beyond its 200-day moving average at 99.83 cents.
Investors have pushed back projected timing of a Bank of Canada rate rise this year, pricing in 0.8 basis points of easing by the September 4 meeting compared to 6.8 basis points yesterday, Bloomberg calculations based on overnight index swaps show.
Canada’s benchmark 10-year bonds rose, pushing the yield down five basis points, or 0.05 percentage point, to 1.86 percent. The 2.75 percent note maturing in June 2022 added 41 cents to C$107.57.
The Bank of Canada will announce further details tomorrow for a Jan. 30 10-year note auction.
The nation’s economy will reach full output in the second half of 2014 instead of the end of 2013, the bank said, as growth accelerates to 2.7% next year.
“While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2% inflation target, the more-muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated,” policy makers led by Carney said in a statement from Ottawa.