Canadian dollar falls third day before Fed policy announcement

‘Diverging Policy’

Implied volatility for three-month options on the U.S. dollar against its Canadian peer fell to as low as 6.27% on an intraday basis, the lowest point since Nov. 22. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.7%.

The cost to insure against declines in the loonie versus its U.S. counterpart touched the lowest in nearly 11 months, with the three-month 25-delta risk-reversal rate dropping to 0.87% on an intraday basis. The average this year is 1.26%. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

“The option market isn’t concerned about the risk of U.S. dollar upside, and I think in terms of CAD we’re just ignoring the positive surprises in terms of the data,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “I think most are short CAD on the outlook for diverging policy between the Fed and the Bank of Canada.”

Bernanke, Poloz

The Fed will start reducing purchases this month, according to 34% of economists surveyed by Bloomberg on Dec. 6, versus 17% a month earlier. Twenty-six percent forecast January and 40% said March. Fed Chairman Ben S. Bernanke will hold a press conference in Washington after the decision.

Poloz said exports and investment have been disappointing and inflation has been “lower than we can explain” during an interview at Bank of Canada headquarters yesterday. The central bank’s forecast is that the economy won’t reach full output until around the end of 2015.

“Given what we know today,” he said, “something really unusual would have to happen to get us back to home base in less than two years.”

The loonie remained lower today even after Canadian wholesale sales rose the most in three months in October, exceeding the highest forecast of economists on increased machinery receipts.

Sales rose 1.4% to a record C$50.5 billion ($47.5 billion), Statistics Canada said today in Ottawa, compared with the median estimate of a 0.3% gain in a Bloomberg survey with 13 responses. The most optimistic estimate called for a 0.6% increase.

The loonie has dropped 4.4% this year against the nine developed-nation currencies in the Bloomberg Correlation- Weighted Indexes, while the U.S. dollar has added 3.6%. The yen leads decliners, with a plunge of 15%, and the euro’s 8.6% advance paces gainers.

www.bloomberg.com

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