C$ hits deeper six-month low as Fed, BoC policy seen diverging

TORONTO: The Canadian dollar deepened its six-month low against its US counterpart on Friday as expectations grew that US Federal Reserve monetary policy would start to tighten, while central banks elsewhere, including Canada, stay where they are.

The Bank of Canada made a series of comments this week that signaled to markets it was in no rush to raise interest rates. Bank officials noted that stronger inflation over the past half year has been due to one-off factors and estimated that the rate at which the economy can work at full capacity with stable inflation is lower than it has been historically.

The Canadian dollar has softened by about 1.7 percent over the past six sessions, touching its weakest level since March 26, while the US dollar was headed for its 11th straight weekly gain against a basket of currencies, its longest winning streak since 1971.

"Every news we've gotten from the Bank of Canada signals that they're not ready at all to change their tone on the economy," said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.

"You'll see probably developing in the coming months, a policy divergence, where the Federal Reserve is gearing up toward hiking rates next year, while the Bank of Canada is really comfortable basically saying 'we're happy where we are'."

At 9:22 a.m. (1322 GMT), the Canadian dollar, which was otherwise outperforming all other major currencies except the Australian dollar, was at C$1.1118 to the greenback, or 89.94 US cents.

This was weaker than Thursday's close of C$1.1108, or 90.03 US cents. It touched as low as C$1.1137, or 89.79 US cents, earlier in the session.

As an exporter of oil and other natural resources, the generally weaker commodity prices of the past month have also weighed on the Canadian dollar, analysts say.

All eyes will be on next Tuesday's gross domestic product numbers for July, the next key economic data for Canada.

Canadian government bond prices were generally lower across the maturity curve, with the two-year off 2.5 Canadian cents, yielding 1.132 percent, and the benchmark 10-year 12 Canadian cents, yielding 2.160 percent.