Canadian dollar tumbles to new 12-year low

17 Jan, 2016

The Canadian dollar tumbled to a fresh 12-year low against its US counterpart on Friday and Canada's 10-year yield hit a record low, pressured by a plunge in crude oil prices and increased bets that the Bank of Canada will cut rates next week. A sell-off on Wall Street added to pressure on the risk-sensitive commodity currency, while bond yields were driven lower as weaker-than-expected US retail sales data lessened the prospects of additional US Federal Reserve interest-rate hikes.
"The market is thinking of additional (Bank of Canada rate) cuts, oil keeps getting punished and all these things contribute to the weaker Canadian dollar," said Andrew Kelvin, senior rates strategist at TD Securities. The implied probability of a Bank of Canada rate cut next week has increased to 64 percent from just 22 percent after a speech last week by the central bank's governor Stephen Poloz.
The market has fully discounted a rate cut by April and it has implied a one-third chance of an additional rate cut by the end of the year. Moreover, the central bank's new lower bound of -0.50 percent has offered scope for even deeper cuts. US crude prices settled at $29.42 a barrel, down 5.71 percent. China managing the depreciation of its currency may be exacerbating market moves, according to Brad Schruder, director of foreign exchange sales at BMO Capital Markets, as it sells holdings in different asset classes around the world to buy its own currency.
The Canadian dollar ended at C$1.4530 to the greenback, or 68.82 US cents, much weaker than the Bank of Canada's official close Thursday of C$1.4362, or 69.63 US cents. The currency's strongest level of the session was C$1.4345, while it hit its weakest level since April 2003 at C$1.4555.
It fell 2.5 percent for the week. Canadian government bond prices were higher across the maturity curve, with the two-year price up 5.5 Canadian cents to yield 0.288 percent and the 10-year rising 79 Canadian cents to yield 1.147 percent. It hit a record low at 1.143 percent. "At these yields we are pricing in a pretty dire growth and inflation environment for a number of years," said Michael Greenberg, a portfolio manager for Franklin Templeton Solutions. The curve flattened in sympathy with US Treasuries, as the spread between the 2-year and 10-year yields narrowed by 5.7 basis points to 85.9 basis points, indicating outperformance for longer-dated maturities.

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