The Canadian dollar weakened for a second day after the Bank of Canada indicated future interest- rate increases are on hold because the nation’s economic recovery is threatened by the currency’s climb beyond parity.
The loonie, as the currency is nicknamed, fell against 14 of its 16 most-traded counterparts. It touched 98.38 U.S. cents yesterday, the strongest level since May 29, 2008. Canada led the Group of Seven nations by raising interest rates three times last year, starting June 1. Its currency has appreciated 6 percent against the U.S. dollar since then.
“There had been a lot of speculation recently about a tightening, possibly as early as March,” Mathieu D’Anjou, a senior economist at Desjardins Group, Canada’s biggest credit union, said in a telephone interview from Montreal. “Given what the bank said yesterday, this seems much less probable now. The bank really doesn’t seem in a hurry to boost its target rate, and this has been putting pressure on the currency.”
Canada’s dollar depreciated 0.4 percent to 99.57 cents per U.S. dollar by 5 p.m. in Toronto, compared with 99.13 cents yesterday. One Canadian dollar buys $1.0043.
The central bank predicted in its Monetary Policy Report released today a “modest” economic recovery hampered by a strong currency that limits exports. It said a “gradual” reduction of monetary stimulus through 2012 will keep inflation under control.
The yield on Canada’s 2-year note fell eight basis points to 1.69 percent, the biggest decline since Sept. 7.
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Canadian Finance Minister Jim Flaherty’s decision Jan. 17 to tighten rules in an attempt to curb record household borrowing may allow the Bank of Canada to hold off on raising interest rates before May at the earliest, David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, said in a note to clients today.
“With the housing market clearly having the air taken out of the balloon, we see no need for the Bank to upset the apple cart any time soon,” Rosenberg wrote. “Our read of the body language is that they do not have a twitchy finger at all.”
Canada’s gross domestic product will grow 2.4 percent this year and 2.8 percent in 2012, the Bank of Canada said yesterday, compared with an October forecast for gains of 2.3 percent this year and 2.6 percent next year.
Yesterday’s statement “was less hawkish than the market had anticipated, with the Bank of Canada highlighting an improved global economic outlook and a better growth profile for Canada,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit, wrote in a note to clients. “However, this was offset by the bank’s view that inflationary pressure remains subdued and the impact that a strong Canadian dollar has on restraining exports.”
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Policy makers reiterated yesterday the economy won’t reach full output until the end of 2012, and the core rate of inflation that excludes eight volatile items won’t accelerate to 2 percent until then.
Crude oil for February delivery fell 0.8 percent to $90.63 a barrel on the New York Mercantile Exchange. Canada is the largest supplier of crude to the U.S.
Source: www.bloomberg.com
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