Loonie sinks to 11-year low as speculation of Bank of Canada rate cut rises

August 24, 2015 Financial Post

Solarina Ho, Reuters

TORONTO — The Canadian dollar pulled back sharply against the greenback on Monday, touching its weakest level in 11 years, as crude prices plummeted as much as 6 per cent after Chinese stocks took their biggest one-day beating since the financial crisis.

A recent string of disappointing data out of China sparked expectations Beijing might take steps to sooth markets. But Chinese stocks fell nearly 9 percent after no move was made.

Worries that stalling growth in one of the world’s largest economies and commodities consumers will spur a global economic slowdown drove a dramatic meltdown in global equities and commodities, with U.S. stocks ending more than 3 percent lower.

The Canadian dollar finished at $1.3262 to the greenback, or 75.40 U.S. cents, a sharp retreat from the Bank of Canada’s official close on Friday of $1.3169, or 75.94 U.S. cents.

The loonie touched $1.3290, or 75.24 U.S. cents earlier in the session, its softest level since August 2004.
The price of crude, a significant Canadian export, tumbled as low as $37.75 a barrel, before settling down 5.46 per cent at $38.24. The commodity had already suffered its longest weekly losing streak since 1986 last week.

A weak greenback, which fell to its lowest level in seven months against a basket of major currencies, did little to support the Canadian dollar, which fell alongside other  commodities-sensitive currencies.

“The loonie has gotten its wings clipped and the momentum against the Canadian dollar is really picking up steam … This is more of a commodities risk-off story, than it is a U.S. dollar story,” said Scott Smith, senior market analyst at Cambridge Global Payments in Calgary.

“Today’s move in equity markets and what’s happening overseas in China really puts concern in the Federal Reserve’s mind as to the international situation and whether or not a rate hike is best course of action at the September meeting.”

Canadian government bond prices were higher across the maturity curve, with the two-year price up 1.5 Canadian cents to yield 0.322 per cent and the benchmark 10-year rising 4 Canadian cents to yield 1.264 per cent.

The Canada-U.S. two-year bond spread was -26.2 basis points, while the 10-year spread was -74.6 basis points.

With prices for North American crude oil, Canada’s largest export, falling below $40 per barrel the market has more than doubled odds since Friday that the Bank of Canada will cut its benchmark interest rate next month, according to Bloomberg calculations based on overnight index swaps.

The odds Canada’s central bank will drop borrowing costs on Sept. 9 back to the record low of 0.25 per cent last seen in the 2009 recession now stand at about 45 per cent.

“The combination of deteriorating financial conditions and weaker oil prices presents serious hurdles beyond the very near-term economic outlook,” said Mark Chandler, head of Canadian fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, in a report to clients.

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