The Canadian dollar weakened (FOREX:CADUSD) for a third day before a Federal Reserve rate decision that may see the central bank slow the monetary stimulus that is thought to depress the value of the U.S. currency.
Canada’s dollar fell against most of its major peers after Bank of Canada Governor Stephen Poloz told Bloomberg News yesterday that recent declines in the currency weren’t enough to help exporters. U.S. 10-year Treasury note (CBOT:ZNH14) yields rose amid mixed forecasts over whether the Fed will decide today to reduce its $85 billion monthly bond purchases. The Canadian dollar is the most inversely correlated with U.S. benchmark yields since 2004, meaning when yields rise, the currency falls.
“If the minority view that the Fed does taper at this meeting is realized, you’d see a very strong U.S. dollar positive response, so unfortunately that would weigh quite clearly on the Canadian dollar,” said David Tulk, chief macro- strategist at Toronto-Dominion Bank’s TD Securities unit, by phone from Toronto. “The bulk of the community and the market is still positioned for a January taper.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.6% to C$1.0666 per U.S. dollar at 10:57 a.m. in Toronto. The currency touched C$1.0708 per U.S. dollar, its lowest point in three years, on Dec. 6. One loonie buys 93.76 U.S. cents.
Canada’s benchmark 10-year government bond fell, with yields rising four basis points or 0.04 percentage point, to 2.68%. The 1.5% security maturing in June 2023 lost 29 cents to C$90.26.
The extra interest available in Canadian two-year government bonds over their U.S. counterparts narrowed to the least the biggest advantage in more that six months. The yield premium fell to 76.7 basis points, the least since May.
The 150-day inverse correlation between the Canadian dollar and U.S. 10-year Treasury yields rose to minus 0.41 on Dec. 10, its strongest since August 2004, from minus 0.05 at the start of the third quarter. A reading of 1 means they’re in lockstep, while minus 1 means they move in opposite directions.
Since the start of 2013, the loonie’s correlation with Treasury yields increased 0.97, the most among its Group of 7 peers, excluding the U.S. dollar.