TORONTO: The Canadian dollar weakened against its US counterpart on Thursday, remaining near 5-1/2 year lows, as investors digested a stunning rate cut by the Bank of Canada a day earlier.
The markets were also following the latest developments at the European Central Bank, which launched a government bond-buying program on Thursday that will pump hundreds of billions of euros of new money into the region's sagging economy.
The ECB's move comes a day after the Bank of Canada blind-sided markets, cutting its benchmark overnight interest rate to 0.75 percent from 1 percent as "insurance" against the impact of low crude prices on the economy of the major oil-producing nation.
"Everyone still trying to adjust expectations," said Greg Moore, senior currency strategist at RBC Capital Markets, who said the move added to a bearish view on the Canadian dollar.
"This connects lower oil prices even more strongly to monetary policy expectations, which had been the second biggest driver of the exchange rate."
At 9:35 a.m. (1435 GMT), the Canadian dollar, which was underperforming against most major currencies, was at C$1.2370 to the greenback, or 80.84 US cents, softer than Wednesday's close of C$1.2335, or 81.07 US cents.
Over the next couple of weeks, market participants will be closely watching crude prices. The Bank of Canada's pre-emptive move was based on oil prices at $60 a barrel, so the longer prices stay below that level, the more dovish expectations will get for another rate cut, Moore said.
The central bank said the weak prices were "unambiguously negative" for Canada's economy. Prices have plunged since last June as global output continued to climb, while demand softened. US crude stood at $47.90 a barrel on Thursday morning.
Canadian inflation data for December and retail sales figures for November are due on Friday, but barring a huge surprise, their impact has been mostly priced in by the market following this week's Bank of Canada forecasts.
Canadian government bond prices were mostly higher across the maturity curve, with the two-year up 4.5 Canadian cents to yield 0.534 percent and the benchmark 10-year up 25 Canadian cents to yield 1.406 percent.
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