C$ hits more than six-year low in rate cut aftermath

July 21, 2015 Reuters

By Solarina Ho

The weakness of the Canadian dollar against its U.S. counterpart continued on Thursday, a day after the Bank of Canada cut its key interest rate for the second time this year, sending the currency to lows last plumbed in March 2009.

Adding to the pressure was the U.S. dollar’s trading near 1-1/2 month highs against a basket of major currencies, with the U.S. Federal Reserve this week reiterating its intention to raise interest rates sometime this year, in sharp contrast to Canada’s central bank.

“We’re seeing … some continued pessimistic sentiment toward the Canadian dollar,” said Scott Smith, senior market analyst at Cambridge Global Payments in Calgary.

“Obviously with the likelihood of Canada entering the technical definition of a recession, all eyes are going to be on how the incoming data develops and whether the bank will have to cut rates again.”  

While there could be some near-term pullback, a number of currency strategists see the loonie breaking through the C$1.30 barrier over the medium to longer term, particularly with the expected Fed increase still looming. But how much further the Canadian dollar will retreat and how long it can sustain those levels will depend in large part on how much of the Fed’s intentions are priced into the market.

The Canadian dollar was trading at C$1.2970 to the greenback, or 77.10 U.S. cents, softer than the Bank of Canada’s official Wednesday finish at C$1.2920, or 77.40 U.S. cents.

The currency traded between $1.2905 and C$1.2970.

Smith said traders were continuing to pile in on the short side of the Canadian dollar.

There was little domestic data on Thursday to budge the currency. However, Canadian and U.S. consumer price inflation data for June are due on Friday at 8:30 a.m. EDT (1230 GMT). If the Canadian CPI comes in soft, the currency could test C$1.3060.

Canadian government bonds were mixed across the maturity curve, with the medium-term bond prices falling. The two-year fell 3.5 Canadian cents in price to yield 0.417 percent, and the benchmark 10-year slid 16 Canadian cents to yield 1.579 percent.

The Canada-U.S. two-year bond spread was -24.4 basis points, while the 10-year spread was -77.7 basis points.

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