C$ softens against rallying US$; focus turns to Bank of Canada

TORONTO: The Canadian dollar weakened on Monday against a stronger greenback, which touched 11-year highs against an index of major currencies on expectations the Federal Reserve will hike interest rates this year in contrast to moves by other major economies.

Investor attention was also turning to the Bank of Canada's latest interest rate decision on Wednesday. The bank cut its benchmark rate by 25 basis points in January to 0.75 percent.

"Everyone's waiting for Bank of Canada now ... We still see broad downside risks for the Canadian dollar going forward, even if they were to hold off this week," said Bipan Rai, director of foreign exchange strategy at CIBC World Markets.

"What's going to move the Canadian dollar forward are going to be two main drivers: what the Bank of Canada is going to do and what the Fed is going to do."

The markets had priced in as much as an 80 percent chance of another 25-basis-point rate cut this week before comments by bank Governor Stephen Poloz dispelled those expectations. Markets are now looking at a less than 30 percent chance of a cut.

The Canadian dollar finished at C$1.2535 to the greenback, or 79.78 US cents, weaker than Friday's close of C$1.2496, or 80.03 US cents.

Rai said in the near term, the currency could revisit the C$1.28 level hit in January. That was the loonie's weakest performance against its US counterpart in nearly six years.

Domestically, cheap oil helped drive Canada's current account gap to C$13.92 billion in the fourth quarter from C$9.6 billion in the previous quarter, according to government data on Monday. That was the biggest deficit in a year, and exceeded forecasts.

The price of crude oil, a key Canadian export, has been under pressure due to excess supply and lukewarm demand. While oil prices had their first monthly gain since last June in February, US prices are still below $50 a barrel.

Crude's drop in recent months also hit business confidence with activity in Canada's manufacturing sector contracting last month to its lowest level on record, according to RBC's Canadian Manufacturing Purchasing Managers' index.

Canadian government bond prices were mixed across the maturity curve, with the longer-term securities lower. The two-year was off 4.5 Canadian cent to yield 0.494 percent and the benchmark 10-year down 73 Canadian cents to yield 1.375 percent.