The Canadian dollar declined (FOREX:CADUSD) versus the majority of its 16 most-traded counterparts before the Federal Reserve decides whether to scale back record stimulus that had fueled demand for riskier assets.
The currency pared losses after Bank of Canada Governor Stephen Poloz told a Vancouver audience growing confidence has brought the country near a “tipping point” for companies to boost investment. Canada’s dollar fell for the first time in three days versus its U.S. peer as Fed policy makers met before a 2 p.m. statement release. A decision to taper will trigger a decline in the Canadian dollar because it hasn’t been fully priced in by traders, said Greg Anderson at Bank of Montreal.
“The loonie’s going to weaken by a% to a% and a half” following the announcement, Anderson, the New York- based head of global foreign exchange strategy at BMO Capital Markets, said in a telephone interview. “Our central scenario is for $10 billion of tapering. It’s hard for investors to take a stand on this. For the most part, investors have tried to square up rather than position for it.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.1% to C$1.0309 per U.S. dollar at 10:47 a.m. in Toronto. One loonie buys 97 U.S. cents.
Canada’s benchmark 10-year government bonds fell, pushing yields up four basis points, or 0.04 percentage point, to 2.81%. The price of the 1.5% securities maturing in June 2023 dropped 35 cents to C$88.93 in Toronto.
Futures on crude oil, the nation’s largest export, climbed 0.8% to $106.22 a barrel in New York. The Standard & Poor’s 500 Index of stocks fell 0.2%.
“Evidence suggests we are now close to the tipping point from improving confidence into expanding capacity,” Poloz said in the text of a speech to the Vancouver Board of Trade. An expected strengthening in exports will bolster confidence and lead to new capacity-building investment, reversing a trend of low capital spending in industries outside of resources, Poloz said.
A weaker Canadian dollar may give a boost to the nation’s languishing manufacturing industry amid stagnating growth. Canada’s economic growth won’t accelerate this year, expanding at the 1.7% rate it posted in 2012, according to a Bloomberg economic survey. The U.S. will pull ahead next year, gaining 2.7% and 3% in 2015, while Canada grows 2.3% and 2.7%, the surveys estimate.
“The market has been quite excited recently that central banks could be hiking in 2014,” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “Downward revisions of growth have tempered that and diluted the loonie’s rise.”
The Bank of Canada has cautioned for more than a year that its next move will be to raise interest rates as a quickening recovery takes up slack in the economy and lifts inflation. The country should expect “a gradual normalization of policy interest rates,” Poloz said Sept. 4.
Economists predict the central bank will raise its policy rate to 1.5% by the end of 2014, from 1% now, according to the median of 19 forecasts in a Bloomberg News survey conducted this month.
In a separate survey, 33 of 64 economists predict the Fed will reduce its $45 billion in monthly Treasury purchases by $5 billion or less, with 31 forecasting a cut of $10 billion or more. It also buys $40 billion in mortgage-backed bonds a month. Chairman Ben S. Bernanke will hold a press conference at 2:30 p.m.
The three-month so-called 25-delta risk-reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, rose to 1.35%, the highest in almost two weeks. The measure rose to 1.64% on Aug. 23, the highest level on a closing basis since July 2. The 2013 average is 1.26%.
The loonie fell 2.9% in the past year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index, making it the third-worst performer. The yen lost 20%, and the Australian dollar slipped 8.7%. The U.S. dollar rose 3.4%.