TORONTO: The Canadian dollar slipped against its US counterpart on Thursday, its second straight decline on renewed weakness in crude oil prices, as the Bank of Canada said cheap oil could push domestic inflation into negative territory.
The currency recovered somewhat in afternoon trade, tracking a similar paring of losses in the oil market.
Canada is a major oil producer, and weakness in the price of crude has weighed on the currency for months. A surprise interest rate cut last month also pressured the currency.
Agathe C?t?, a deputy governor at the central bank, said in a speech on Thursday there was no need to fear oil-related deflation and that the next interest rate decision due on March 4 had not been predetermined.
"The speech today alluded to that (oil price fall)potentially leading price pressures into negative territory but she did mention that doesn't necessarily mean that the Canadian economy is heading into a deflationary spiral," said Bipan Rai, director of foreign exchange strategy at CIBC World Markets.
The Canadian dollar ended the session at C$1.2498 to the greenback, or 80.01 US cents, weaker than Wednesday's close of C$1.2418, or 80.53 US cents.
Rai said the currency could test C$1.28 in the near term, and even push towards C$1.30 in coming months as monetary policy divergence between Canada and the United States plays out.
Canadian government bond prices were mostly higher across the maturity curve, although the two-year slipped 1 Canadian cent to yield 0.427 percent. The benchmark 10-year rose 16 Canadian cents to yield 1.457 percent.
Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada, said Canada's currency will likely face more obstacles in coming weeks and months as slumping oil prices feed into softer economic data.
"Unequivocally, over the next three months or so you're going to see a patch of soft data coming out in Canada related to the oil price decline. It's hard to bet against the trend of a weaker Canadian dollar going forward."
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