Bank of Canada Governor Stephen Poloz has sparked a fire sale on the Canadian dollar.
The currency plunged as much as 0.5 per cent to $1.3103 against its U.S. counterpart, the lowest on an intraday basis since September 2004. It fell after a private gauge of Chinese manufacturing dropped to the lowest in 15 months, signaling decreased commodities demand. The loonie, as the Canadian dollar is known for the image of the aquatic bird on the $1 coin, has tumbled since the central bank cut its benchmark interest rate on July 15 for the second time this year.
"The Canadian dollar has a triple whammy against it" of falling commodity prices, monetary easing by the Bank of Canada and an expected interest-rate increase by the Federal Reserve, said Steve Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. He expects Canada's currency to weaken to $1.40 over the next two years.
Policy makers led by Poloz said the collapse in oil prices is eroding the outlook for the nation's economy, which is undergoing a "significant and complex adjustment."
The Canadian currency fell 0.2 per cent to $1.3066 versus the U.S. dollar as of 11:57 a.m. in Toronto. That's weaker than $1.29, the median year-end estimate of analysts and strategists surveyed by Bloomberg. The loonie is poised for a 4.6 per cent decline this month.
Bearish Bets Traders are still pricing in the chance of another interest-rate cut, though these expectations have moderated in the last week. Trading in overnight index swaps show an implied policy rate of 0.39 per cent in six months, compared to the Bank of Canada's current 0.5 per cent, Bloomberg calculations show. Last week they were pricing a rate of 0.36 per cent.
Hedge funds and other money managers boosted net bearish bets on the loonie to a 16-month high in the run-up to the Bank of Canada meeting, data from the Commodity Futures Trading Commission showed.
"The market is pretty bearish" amid concern that global commodities demand will slow, Bipan Rai, director of foreign– exchange strategy at Canadian Imperial Bank of Commerce's CIBC World Markets unit, said by phone from Toronto. "The Canadian economy right now is hurting, there's no two ways about it."
The divergence in policy between Canada and the U.S., where the Fed is expected to raise interest rates this year, has boosted the difference in the countries' 10-year debt yields to the highest on record, making Canadian bonds less attractive. Canada's two-year yields are the lowest relative to the U.S. since 2007.
–With assistance from Dennis Pettit and Vincent Cignarella in New York and Ari Altstedter in Toronto.