Why Carney Proves Different From Other Central Bankers With Listing Loonie

Canada’s currency is poised to weaken as investors bet Bank of Canada Governor Mark Carney will keep interest rates low to protect the economy instead of fighting inflation by raising interest rates.

Falling unemployment, faster growth than in the U.S. and a shrinking deficit drove Canada’s dollar to the highest in more than three years against the greenback on April 29 as traders anticipated Carney would join central bankers from Europe to China in boosting rates. Instead the 46-year-old former Goldman Sachs Group Inc. managing director kept interest rates unchanged today, downplay inflation and highlighting risks to the Canadian economy from a strong currency.

Since then, the so-called loonie has dropped against 14 of its 16 most-traded counterparts, falling 2.8 percent against the Swiss franc and 4.8 percent versus New Zealand’s dollar. Bank of America Merrill Lynch forecasts the currency will fall 10 percent through 2012 against the greenback. Canadian-dollar bulls outnumber bears by the narrowest margin this year according to Commodity Futures Trading Commission data.

“All of the fundamentals that one would traditionally look at scream out for a rate hike,” said Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management, which oversees about C$250 billion ($257 billion). “The reason the market is so cautious on the prospect of rate hikes is the Canadian dollar is still quite strong and the Bank of Canada is expressing a lot of concern about it.”