The Canadian dollar (FOREX:CADUSD) reached a four-year low for a second day amid speculation the nation’s central bank may signal at a meeting next week the need for lower interest rates amid faltering economic growth.
The currency erased losses as crude oil, Canada’s biggest export, climbed amid a drop in U.S. inventories. The loonie, as the currency is called, has fallen this month against 15 of 16 major peers as interest-rate expectations between the U.S. and Canada diverged, with the Federal Reserve slowing monetary stimulus. Bank of Canada officials meet Jan. 22, when they will also release a quarterly report on their view of the economy.
“People are starting to get the view the Bank of Canada is certainly not going to be raising rates, but might actually turn more dovish or even open the door to rate cuts,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto. “You’re getting to the sell-Canada kind of story.”
The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, depreciated as much as 0.4% to C$1.0991 per U.S. dollar, the weakest since September 2009, before trading at C$1.0923 at 11:47 a.m. in Toronto, up 0.2%. One loonie buys 91.55 U.S. cents.
West Texas Intermediate crude advanced after a government report showed U.S. inventories tumbled to the lowest level in almost 22 months. Futures jumped as much as 2% to $94.46 a barrel in New York.
The loonie may be poised to reverse its decline, a technical indicator signaled. The currency’s 14-day relative- strength index fell below 30 for a second day, the first time in five weeks it’s been below that threshold, which shows it may have weakened too much, too fast.
Canada’s benchmark 10-year government bonds fell for a second day, pushing yields up one basis point, or 0.01 percentage point, to 2.59%. The 1.5% security maturing in June 2023 declined 6 cents to C$90.98.
The yield advantage of Treasury 10-year notes over their Canadian peers, an indication of the U.S. economy’s prospects for growth, reached 30 basis points. That’s the widest difference since December 2010.
Canadian five-year bond yields rose one basis point to 1.78% before the Bank of Canada auctions C$3.4 billion ($3.1 billion) of the securities. The 1.75% debt being sold matures in March 2019.
The Canadian currency may weaken to C$1.12 per U.S. dollar in the next three months on the increased chance Bank of Canada Governor Stephen Poloz will indicate as early as next week that lower interest rates are needed, UBS AG analysts Gareth Berry and Geoffrey Yu wrote in a note to clients.
A report last week showing a trade deficit nine times wider than economists forecast started the Canadian currency’s plunge. While the Bank of Canada is expecting exports to revive flagging growth, Poloz said in a Dec. 17 interview that he doesn’t “fully understand” why shipments haven’t been stronger.
Investors such as Amundi Asset Management and Brandywine Global Investment Management LLC have joined hedge funds and other speculators in betting against the loonie on a view that export will be hampered by lack of pipeline infrastructure for shipping crude oil and a shrunken manufacturing sector.
The loonie could weaken to C$1.17 per U.S. dollar by the second half of this year and C$1.30 by the end of next year, according to Jack McIntyre, who helps manage $38 billion in bonds from Philadelphia for Brandywine, and is borrowing the currency to invest in higher-yielding assets.
Fed policy makers said Dec. 18 they will cut monthly bond purchases to spur growth to $75 billion from $85 billion, citing economic improvement. They will reduce the amount by $10 billion at each meeting this year before ending the program in December, according to a Bloomberg survey of economists taken Jan. 10.
The U.S. dollar rose against most major peers today as a report showed manufacturing in the New York region grew more than forecast and the World Bank increased its global economic- growth estimate.