C$ softens on the week, but avoids C$1.10

Fri Jan 17, 2014 4:31pm EST
 
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By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday but staved off a breach of C$1.10 as the divergent paths of the two countries' recent economic data and monetary policy outlooks force investors to reassess the loonie's value.

The currency slipped 0.7 percent, or three-quarters of a cent, on the week to hit a four-year low against the greenback and has failed to gain ground on most other major currencies after falling 2.5 percent last week.

Traders will have another chance to test the psychologically important C$1.10 level next week when the Bank of Canada holds a policy-setting meeting mid-week that is book-ended by significant data reports. It traded as weak as C$1.0992 on Wednesday.

"Our view is that you are going to have something fairly dovish from the bank, but they are not going to change their growth outlook for Canada," said Mark Chandler, Royal Bank of Canada's head of Canadian fixed income and currency strategy.

The central bank, which has held its key rate at 1 percent since 2010, cut its 2014 growth projections to 2.3 percent in October at the same time it dropped its rate-hike bias.

The loonie, as Canada's currency is colloquially known, has weakened sharply recently as a string of dismal data points cast a pessimistic pall on the country's economic outlook.

Exacerbating the fall, the more dovish tone from Canada's central bank has contrasted sharply with the more hawkish tilt from the Federal Reserve, which has been emboldened by robust U.S. economic data.

U.S. industrial and housing data on Friday helped support the view the world's largest economy is improving enough to keep the Fed's stimulus reduction on track.   Continued...