Poloz Feeds Loonie Bears as Strategists Recalibrate: Currencies

Jan 23, 2014 6:02 am ET

(For a Currencies column daily alert: SALT FXCOL.)

Jan. 23 (Bloomberg) -- Bank of Canada Governor Stephen Poloz is giving investors the green light to push the nation’s currency, the worst performing major exchange rate over one- and six-month periods, even lower.

The Canadian dollar weakened to the lowest in more than four years yesterday against its U.S. counterpart after Poloz left the main interest rate unchanged and said the strength of the country’s currency is hurting exporters. Hedge funds and other large speculators have already amassed almost record bets this year for the local dollar to decline as Canada’s trade deficit came in nine times wider than forecast and a report showed the country shed jobs in December.

The drop pushed the currency below the median forecast of C$1.10 per U.S. dollar for the end of the year in a Bloomberg survey of 63 contributors, suggesting strategists will be revising estimates lower. While some investors speculated that the central bank would signal a bias toward easing policy, Poloz said his next rate move depends on how economic data change the balance of risks to the world’s 11th-largest economy.

“The bears are pushing on what very much appears to be an open door,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG, said by phone from New York. “The Bank of Canada is amenable to further currency weakness to help competitiveness.”

Purchasing Power

Canada’s dollar, often called the loonie for the aquatic bird on the C$1 coin, fell 1.1 percent yesterday in Toronto to C$1.1087. It touched C$1.1091, the lowest level since September 2009. Ruskin said fair value was around C$1.15.

The loonie is the worst performer over the last one and six months against a basket of nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes, with declines of 4.2 percent and 7.7 percent. Even so, the dollar is still 11 percent overvalued compared to its U.S. peer, according the Organization of Economic Cooperation and Development purchasing power data.

“Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports,” the bank said in its quarterly Monetary Policy Report.

‘Too Strong’

Poloz told reporters at a press conference yesterday that the weaker currency will give an “extra kick” to the economy and likened it to icing on a cake, with support for exports coming mainly from accelerating U.S. growth. Canada sends three- quarters of exports to its southern neighbor.

“Without directly saying it, Poloz leaves the impression that he views the currency as being ‘too strong’ and would feel quite comfortable with a USD/CAD of C$1.15,” JPMorgan Chase & Co. New York-based strategists Kevin J. Hebner and Niall O’Connor wrote in a client note yesterday

Speculative bets against the loonie outnumbered those for the currency by 67,345 contracts on Jan. 14, approaching the record 84,906 net-short positions reached in January 2007, according to data from the Washington-based Commodity Futures Trading Commission. A year earlier, futures showed net-long positions of 68,668 contracts.

“The Bank of Canada’s concern has been that the economy is suffering from a version of Dutch Disease, where commodity exports are crowding out any other exports, in particular manufacturing exports,” Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc., said by phone from London. “What they’re trying to promote is a mix of drivers for more sustainable growth.”

‘Two-Speed Economy’

In the past decade, employment in the resource sector has increased 20 percent while manufacturing employment has fallen 23 percent, according to data compiled by Bloomberg. Since the depths of Canada’s 2009 recession, employment in the resource sector has increased 39 percent, while manufacturing has barely changed.

In the same period, the average price of oil has increased 177 percent while the Canadian dollar appreciated 17 percent against its U.S. peer, reaching parity as recently as February.

“In the past, when we had a recession, the Canadian dollar would go down, so we had a bit of a buffer; in this case, it did the opposite,” said Poloz said in a press conference. It creates “a two-speed economy, where the resource sector benefits from this combination of forces, while other sectors, like the manufacturing sector, has a more challenging time.”

Monetary Stimulus

Poloz is following officials from more than 12 other nations who have said monetary stimulus in large economies like the U.S. and Japan -- policies which have sparked accusations of currency wars -- inflated the value of their currencies to uncompetitive levels. Reserve Bank of Australia Governor Glenn Stevens has said the economy needs a weaker currency on at least five occasions since October.

“The institutional debasing of currencies that began a couple years ago is continuing,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC, said in a telephone interview from New York. “Now the flag is being carried by the Bank of Canada.”

The central bank kept its benchmark interest rate at 1 percent yesterday even as it predicted inflation will advance at an average annualized pace of 0.9 percent in the first three months of this year -- below the bank’s 1 percent-to-3 percent target band.

‘Currency Wars’

“Things have changed -- the primary participants in the currency wars were central banks in the emerging markets and the Bank of Japan,” said Marinov of Citigroup, which lowered its year-end forecast to C$1.12 from C$1.08. Now, for the Bank of Canada, “you would argue commentary on the currency may feature more prominently down the road.”

The bank reiterated the economy is around two years away from full output because company spending and shipments abroad have disappointed.

Canada’s November trade deficit widened to C$940 million ($848 million), Statistics Canada in Ottawa said Jan. 7. The median forecast was for a C$100 million deficit, according to a Bloomberg survey. Canada’s gross domestic product expanded 0.3 percent to an annualized C$1.60 trillion in October.

Canada’s economy still has “significant” excess capacity and inflation is being held down by global weakness in food prices and a recent increase in retail competition, the bank said. Consumer prices will advance at an average year-over-year pace of 0.9 percent in the first quarter, before quickening to 1.5 percent in the fourth quarter, the bank forecast.

“They want a gradual weakening,” Daniel Janis, who oversees about $17 billion in fixed income for Manulife Financial Corp.’s asset-management arm, said yesterday in a phone interview from Toronto. Janis said he’s positioned his portfolios for the loonie to fall another 3 percent to 5 percent. “We’re the most aggressive we’ve been because it’s almost 100 percent no Canada.”

--With assistance from Katia Dmitrieva in Toronto. Editors: Dave Liedtka, Robert Burgess