Canada dollar at almost 3-year low on 2014 central-bank outlook

December 30, 2013 05:05 AM

The Canadian dollar (FOREX:CADUSD) traded at almost the lowest point in more than three years as speculation the Bank of Canada will keep interest rates unchanged in 2014 bolstered bets against the currency.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fluctuated against its U.S. peer with the U.S. Federal Reserve set to slow its monetary stimulus program in January. Those borrowing in Canadian dollars to fund investments in other currencies, a wager the loonie will decline, saw profit against 12 of the world’s major currencies this year, according to Bloomberg data.

“I do expect the Canadian dollar to underperform the U.S. in the coming quarter,” said Blake Jespersen, managing director of foreign exchange at Bank of Montreal, by phone from Toronto. “As the Fed starts to move more aggressively on their tapering, and their economy starts to outperform ours, I think their dollar will do the same.”

The loonie rose 0.2 percent to C$1.0682 per U.S. dollar at 10:29 a.m. in Toronto after dropping as much as 0.2 percent to C$1.0728. The currency touched C$1.0738 on Dec. 20, the lowest since May 2010. One loonie buys 93.62 U.S. cents.

The loonie is down 0.6 percent this month against the U.S. dollar and has lost 7.1 percent this year, the biggest annual decline since 2008.

“We’ve seen a little bit of selling of U.S., buying of Canadian, for month-end rebalancing,” said Jesperson.

Interest Rates

The Bank of Canada won’t raise interest rates until the second half of 2015, according to a Bloomberg survey of 16 economists conducted between Dec. 6 and Dec. 11.

The Fed said on Dec. 18 it will let interest rates rise by cutting its monthly asset purchases in January to $75 billion from $85 billion. Policy makers will probably reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said in a Bloomberg survey on Dec. 19.

The cost to insure against declines in the loonie versus its U.S. peer touched the lowest in almost 12 months, with the three-month 25-delta risk-reversal rate dropping as low as 0.86 percent, the least since January. The average this year is 1.25 percent. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

‘Speculative Positioning’

Implied volatility for three-month options on the U.S. dollar against its Canadian peer rose to 6.8 percent, the highest in three weeks. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.7 percent.

“As we transition into 2014, we’re going to have the theme of monetary-policy divergence,” Mazen Issa, Canada macro strategist at Toronto-Dominion Bank, said by phone from Toronto. “If you look at speculative positioning in the market, you’ve seen a significant amount of Canadian dollar shorts.” A short is a bet a currency will fall.

Bearish bets on the loonie by hedge funds and other speculators are at the highest since the week of May 3, according to figures from the Washington-based Commodity Futures Trading Commission. The difference in the number of wagers on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 65,500 on Dec. 17, compared with net shorts of 57,514 a week earlier.

The loonie is down 4.7 percent this year against nine developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The Japanese yen has posted the biggest decline with a 16 percent drop, while the U.S. dollar added 3.5 percent.

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