Doug Porter, chief economist at the Bank of Montreal, said the Canadian dollar is overvalued by 5% to 10% given levels of commodity prices.
Porter, speaking in an interview Tuesday at Bloomberg’s Canada Economic Summit in Toronto, said the Canadian dollar will continue to be supported by safe-haven flows in the next couple of years, keeping it trading near parity with the U.S. dollar before weakening in the “medium-term.”
There is also no urgency for the Bank of Canada to raise interest rates, Porter said, adding there is a case for the country’s central bank to drop its tightening bias because the housing market has cooled.
The highest inflation-adjusted yields on Canadian government bonds in almost three months suggest that incoming Bank of Canada Governor Stephen Poloz has room to reverse Mark Carney’s tightening bias and cut interest rates.
The difference between the return of the benchmark 10-year bond and the annual rate of inflation, known as the real yield, widened to 152 basis points on May 17, after Statistics Canada said consumer prices fell to 0.4 % in April. That’s above the average of 114 basis points since before the start of the global financial crisis in 2008.
“After the recent decline in inflation there are still question marks on if the central bank can or will maintain its hiking bias,” Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto. “Performance from here will be dictated by if the Canadian economy can hook on to the coattails of the emerging U.S. economy.”
Canada’s dollar fell to a more than two-month low against its U.S. peer Tuesday amid speculation improvement in the world’s largest economy would spur the Federal Reserve to reduce stimulus, known as quantitative easing.
The currency declined against the majority of its 16 most-traded peers as crude oil, Canada’s biggest export, snapped a four-day rally amid falling commodities. Fed Chairman Ben S. Bernanke will discuss the economic outlook in congressional testimony and the central bank will publish minutes of its latest meeting Wednesday.
Canada’s dollar is “really following the flow, which sees the U.S. dollar stronger across the board,” Jack Spitz, managing director of foreign exchange in Toronto at National Bank of Canada, said in a telephone interview. The U.S. currency is gaining on “the anticipation that QE tapering is in the cards.”
The loonie fell 0.6% to C$1.0306 per U.S. dollar at 10:55 a.m. in Toronto after touching C$1.0321, weakest since March 7. One loonie buys 97.03 U.S. cents.
Crude-oil futures fell 0.6 % to $96.11 a barrel in New York. The Standard & Poor’s 500 Index of stocks dropped 0.1 %.
Canada’s benchmark 10-year government bonds fell, with yields rising two basis points, or 0.02 percentage point, to 1.94 %. The 1.5% note maturing in June 2023 dropped 15 cents to C$96.05.