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.
The world’s 11th-largest economy will be hobbled this year by weak exports and record debts that are curbing consumer spending, even as the risks of a major international shock have eased, the Bank of Canada said. It remains the lone central bank among Group of Seven nations suggesting a rate increase, as its peers have added stimulus in recent months.
“It’s more dovish than they’ve been in previous statements,” said John Curran, a senior vice president at USForex Ltd., an online foreign-exchange dealer, by phone from Toronto. “They’ve always said we’re going to raise sooner rather than later, and now they’re backing away from that slightly, so you’re seeing the Canadian dollar weaken on that.”
The Federal Reserve has a short-term interest rate target of zero to 0.25% and is expanding its bonds buying in an effort to reduce U.S. unemployment and boost the economy of Canada’s largest trading partner.
“I would probably sell U.S. dollars at parity,” said Audrey Childe-Freeman, head foreign-exchange strategist at Bank of Montreal by phone from London. “If you look at the respective Fed and Bank of Canada meetings, it really feels like the advantage remains with the Bank of Canada in terms of monetary policy support, and that’s supportive for the Canadian dollar.”
The loonie is unlikely to close above parity, and will develop a new trading range between C$1 and 98 cents per U.S. dollar, Childe-Freeman said.
Carney is leaving Canada’s central bank June 1 to lead the Bank of England a month later, and will keep his other role as Chairman of the Financial Stability Board.
Economists predict Senior Deputy Governor Tiff Macklem will become the next governor, a subject he didn’t address at today’s press conference. Macklem did say declines in housing starts and resales are signs household imbalances are easing.
The loonie has fallen 2.3% during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 5.9% while the greenback has dropped 4.5%.