The Canadian dollar fell to the lowest level in two years as weak exports last quarter added to concern expressed by Bank of Canada policy makers that a projected driver of economic growth has not yet materialized.
The currency weakened for the second day before a central bank meeting Dec. 4, when policy makers are projected to hold the benchmark interest rate at 1 percent. A report last week showed third-quarter economic growth was the fastest in two years even as exports fell, frustrating the Bank of Canada’s expectations for trade to drive growth as over-indebted consumers pare back.
“You have very little positive sentiment around the Canadian dollar, and that was revealed by the way the market reacted to a very good gross domestic product number on Friday,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “Strong data is going to be almost discounted, because the bank is still concerned about the overall health of the economy, and it’s tied directly to these export figures.”
The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.2 percent to C$1.0642 per U.S. dollar at 10:31 a.m. in Toronto. It touched C$1.0654 per U.S. dollar, the lowest since October 2011. One loonie buys 93.97 U.S. cents.
The 10-year Canadian government benchmark bond fell, with yields rising six basis points, or 0.06 percentage point, to 2.61 percent. The 1.5 percent security maturing in June 2023 lost 43 cents to C$90.74.
The extra interest investors receive in U.S. 10-year government bonds compared to their Canadian counterparts was 18 basis points, near the widest point since February 2011.
The decline in the loonie has pushed the currency through the lower level of the 30-day Bollinger band, signaling a turnaround is imminent, data compiled by Bloomberg show.
The 14-day relative-strength index for the Canadian dollar versus the greenback fell to 29, breaching the threshold of 30 that shows it may be due for a reversal.
The loonie’s slide lower in the face of a run of positive data opens the possibility for the currency to strengthen after the central-bank meeting, Geoffrey Yu of UBS AG wrote in a note to clients. In the long run, however, the combination of tighter monetary policy pushing rates up in the U.S. and the Bank of Canada keeping rates low to spur business spending mean the currency has to fall, he said.
“Even without the U.S. in the picture, rebalancing the Canadian economy by definition would imply downside growth risks and keeping debt servicing ratios lower is an imperative,” he said. “USDCAD positioning needs to adjust to a ‘less-negative’ end to the year, but nothing more.”
Technical analysis suggests a fall by the Canadian currency below C$1.0658 per U.S. dollar may lead to a drop to as low as C$1.0804, Yu said.
The cost to insure against declines in the loonie versus its U.S. counterpart touched the highest in seven weeks, with the three-month so-called 25-delta risk-reversal rate rising to 1.4375 percent, the most since Oct. 11. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite. The 2103 average is 1.27 percent.