Carney’s Currency Warning May Have Fleeting Influence on Loonie
Bank of Canada Governor Mark Carney’s threat of action to stem gains in the nation’s currency may only have a fleeting influence on currency traders, analysts said.
Carney said yesterday that investors lost their “focus” on the central bank’s commitment to meet a 2 percent inflation target, and said action to weaken the Canadian dollar is an “option.” Hours later, Citigroup Inc. and MF Global Canada Co. said investors should keep buying the currency.
“We believe the Canadian dollar vulnerability should prove fleeting,” after Carney’s remarks, Citigroup strategists Todd Elmer in New York and Michael Hart in London wrote in a note to clients. “Canadian data is consistently surprising on the upside and Canada’s fiscal position is better than that of its peers.”
The recommendations widen a split that began in June when Carney first said the currency’s rise was a risk to inflation and economic growth. The main tool to influence the economy and currency has been exhausted after he cut his key interest rate to a record low 0.25 percent in April.
“Carney is basically issuing a challenge to the market to defy his desire for a certain level for the Canadian dollar,” said Aaron Fennell, a Toronto-based futures and currency broker at Lind-Waldock, a unit of MF Global Canada. “Mark Carney talking the U.S. dollar down is nothing more than an excellent buying opportunity.”
Repeated Promise
The Canadian currency, nicknamed the “loonie” for the bird on the dollar coin, depreciated 0.4 percent to C$1.0474 per U.S. dollar in Toronto yesterday, from C$1.0429 on Oct. 21. It has fallen 1 percent this week after the bank repeated a promise to keep its main rate unchanged through June 2010 and said the currency could “more than offset” other recent signs of economic growth.
The loonie has appreciated 16 percent this year, making the country’s shipments of automobiles, lumber and metals to the U.S. less competitive. The stronger currency restrains inflation by making imports cheaper.
“Markets should take seriously our determination to set policy to achieve the inflation target,” Carney told reporters in Ottawa yesterday, when asked if traders are contemplating the chances of central bank intervention. “Markets sometimes lose their focus; we don’t lose our focus.”
The Bank of Canada said that strength in the currency appears “to have been increasingly driven” by U.S. dollar weakness. It also raised its assumption for where the Canadian dollar will trade through 2011, to 96 U.S. cents, from 87 U.S. cents forecast in July.
‘Credibility at Stake’
“I think the odds of a foreign-exchange intervention are so far out of the money that the Bank of Canada has put a little credibility at stake,” said Sebastien Galy, a currency strategist in New York at BNP Paribas.
The central bank last acted to influence the Canada-U.S. exchange rate in 1998. The currency rose to a record high of 90.58 Canadian cents to the U.S. dollar in November 2007.
“Every other time we heard rhetoric, the market hasn’t paid attention to it,” said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign- exchange dealer. “They would have to dust off their dealing machines since they haven’t intervened in 10 years.”