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Canadian Dollar Sinks Below 90Ę as Bank of Canada ĎDeclares Open Season on LoonieThursday, January 23, 2014 > 10:56:57
(The Globe & Mail – Michael Babad)
The Canadian dollar is plumbing new depths this morning after the Bank of Canada’s declaration of “open season” on the rapidly-sinking currency, spurred on by a weak economic reading from China.
The loonie, as the country’s dollar coin is known, has been eroding for months but with a rapid decline in January. It has been driven lower by an easy-going, or “dovish,” central bank, soft economic measures and damning projections from some analysts.
Yesterday, it plunged below 91 cents U.S. after the Bank of Canada released its rate decision and monetary policy report that, over all, suggests interest rates aren’t going anywhere at any time soon because of its focus on stubbornly low inflation.
Coupled with that was a line in the report that warned the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports” even with its stunning loss over the past year.
“Until today, the Bank of Canada had been careful not to open talk down the loonie,” chief economist Douglas Porter of BMO Nesbitt Burns said late yesterday in a research note titled “BoC declares open season on loonie.”
“They effectively gave sellers the green light in today’s monetary policy report by stating that even with the big drop in recent weeks, it remained high and would still ‘pose a competitiveness challenge for Canada’s non-commodity exports,” he added.
“As if on cue, the currency promptly fell another 1% on Wednesday.”
At that point, the dollar was nearing the 90-cent level. Then this morning, it plunged again to a low of 89.5 cents before retaking just a bit of ground to sit at about 89.7 cents. This all has to do with the central bank’s “bias,” or what it’s thinking about future moves in interest rates.
Given their obsession with disinflation, or declining inflation, some observers have suggested that Governor Stephen Poloz and his colleagues at the central bank may be leaning toward cutting their benchmark rate from its current 1%.
Most, however, don’t see that happening, though they also don’t believe Mr. Poloz will raise rates at any time soon.
What got the markets going yesterday, said chief currency strategist Camilla Sutton of Bank of Nova Scotia, was a shift by the central bank “a bit toward the dovish side of neutral,” which implies interest rates are on hold for that much longer.
“I think this market just wants to be short CAD,” she added, referring to the currency by its symbol.
Some observers also believe that this is a deliberate move by Canadian policy makers to devalue the currency in a bid to boost the country's exports, as a weaker loonie lowers the cost of Canadian goods in the United States.
The Bank of Canada denies any such thing, but everyone agrees that Mr. Poloz, while not driving down the dollar, is pleased with the outcome.
That issue of a potential interest rate cut is playing through the market.
“I think that by June or July we’ll have a much firmer feel for whether the BoC is in cut mode after spring housing data lands and [inflation] likely drifts lower yet over coming months after a temporary rise this month,” said Derek Holt of Bank of Nova Scotia.
The Bank of Canada targets an annual inflation rate of 2%, and, according to yesterday’s report, it doesn’t see getting back there until early 2016.
“The added wildcard is the speed of CAD depreciation,” Mr. Holt said.
“I think the BoC is talking down the currency without the inconveniencies of doing so explicitly after having been burned by such attempts in the past, but an uncontrolled plunge in CAD that stokes potential import price pass-through effects into [inflation] would garner more attention than the almost benign neglect toward the issue in yesterday’s BoC statement, MPR and press conference.”
A lower currency, of course, doesn’t just boost exports, but pushes up the cost of imported goods, as well, which is what Mr. Holt was referring to in terms of the ripple effect.
Stephen Gallo, Bank of Montreal’s European chief of foreign exchange strategy, believes the dollar could hit 89 cents by tomorrow depending on the next economic readings to come.
All of this, he noted, comes amid a global backdrop of “abnormal normalization.”
What he means by that is that major economies are recovering, but central banks are printing massive amounts of money. Which means it’s not normal at all. And much of the recovery is due to such excessive stimulus.
“Policy makers are basically firing bullets and fighting fires,” Mr. Gallo said. “To phrase this in a different way: Any landing of a plane you can walk away from is a good one,” he added.
“Yesterday, the BoC used minimal ammunition but got a decent amount in return anyway. This is not a ‘runaway’ weakening of the CAD mainly because the BoC is sitting on top of it.”