C$ hits 3-yr low as investors eye Bank of Canada policy decision

December 16, 2013 Reuters 0 Comments

By Leah Schnurr

December 3, 2013

TORONTO, (Reuters) – The Canadian dollar hit its lowest level in more than three years on Tuesday on investor concern that the Bank of Canada would strike a more dovish tone in a policy decision due later this week, and on views the United States could reduce its stimulus sooner rather than later.

The currency has fallen in four of its last five sessions, dropping through key support levels as bearish sentiment builds.

The Bank of Canada will release its interest rate and policy decision on Wednesday following its first meeting since a policy shift in October, when the central bank dropped any mention of a rate hike.

That change pushed out market expectations for the next rate hike into 2015. Rates have been at 1 percent since 2010.

Analysts say that while they are not expecting the central bank to take a more dovish tone on Wednesday, markets are pricing in that risk.

“There’s definitely a risk that they could be on the dovish side of things. I wouldn’t say that I’m necessarily in that camp,” said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

He said that while October’s inflation reading came in below expectations, core inflation – which strips out volatile items and is closely watched by the central bank – was more firm.

The Canadian dollar was at C$1.0656 to the greenback, or 93.84 U.S. cents, weaker than Monday’s close of C$1.0641 or 93.98 U.S. cents.

The loonie traded as far as C$1.0664, its lowest level since the end of August 2010. The low previously hit this year in July at C$1.0609 had represented significant support for the currency, which it first broke through late last week.

“Right now is a pretty key level, just being a fresh cycle high. If we push through here, it could get a lot uglier for the Canadian dollar,” said Smith.

If the loonie pushes through current levels, C$1.07 will be the next one to watch, Smith said.

The Canadian dollar was also weak against most of its other major currency parings, including the euro and the British pound after data showed Britain’s construction sector unexpectedly picked up more speed in November.

The euro hit an 3-1/2-year high against the Canadian dollar, while the pound was at a 4-year high.

Investors will also be taking in a number of economic reports out of the United States this week, including consumer sentiment, third-quarter gross domestic product and the closely-watched unemployment report.

The data this week could be key in calibrating market expectations for when the Federal Reserve may start to wind down its economic stimulus.

Investors are trying to gauge whether the Fed will start to reduce its amount of bond purchases at its next meeting later in December or hold off until the new year.

Monday’s better-than-expected factory data has boosted sentiment that there is an outside chance the start of tapering could come in December, said Smith.

The two-year bond was up 5 Canadian cents to yield 1.083 percent, while the benchmark 10-year bond rose 23 Canadian cents to yield 2.579 percent.