CANADA FX DEBT-Loonie starts 2015 at 5-1/2-year low

Fri Jan 2, 2015 4:47pm EST
 
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* Canadian dollar at C$1.1762 or 85.02 U.S. cents
    * Bond prices higher across the maturity curve

 (Adds details, quotes, updates prices)
    By Leah Schnurr
    OTTAWA, Jan 2 (Reuters) - The Canadian dollar dived to a
more than 5-1/2-year low against the greenback on Friday,
striking a weak tone at the start of 2015 as it took hits from a
rally in the U.S. dollar and another drop in oil prices.
    Traders returned to their desks to take the loonie
resoundingly lower after it had drifted higher in light holiday
volume earlier this week. Investors bet that many of the themes
that battered the currency in 2014 were still intact, including
the likelihood that the U.S. Federal Reserve will raise interest
rates this year.
    The loonie shed more than 1 percent, adding to the 8.6
percent loss it racked up for 2014.
    Anticipation that the European Central Bank will take more
aggressive steps to loosen monetary policy later this month
added to the favor the market is bestowing on the U.S. dollar
and highlighted the divergence between monetary policy at the
Fed and in much of the rest of the world. 
    A paper from a Fed official earlier this week said a
forecasting tool developed by the central bank recommends rates
should be hiked immediately. The Bank of Canada is not expected
to raise rates until after the Fed does, putting more pressure
on the loonie. 
    "As policy divergence happens, it's happening further and
more violently than has been priced in, so there's more room to
go in the U.S. dollar rally," said Camilla Sutton, chief
currency strategist at Scotiabank in Toronto.
     The Canadian dollar ended the North American
session at C$1.1762 to the greenback, or 85.02 U.S. cents,
weaker than Wednesday's official close from the Bank of Canada
of C$1.1601, or 86.20 U.S. cents. 
    The loonie finished near its session lows, putting it at its
lowest level since May 2009.
    While the next level to watch will be C$1.18, there is a
risk the currency sees a temporary push to C$1.20, Sutton said. 
    A decline in the price of oil also hurt the loonie, with
crude ending down 58 cents at $52.69 a barrel. Whether
oil will see another significant plunge is a risk for Canadian
dollar forecasts this year, as oil is a major export for Canada.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1-1/2 Canadian
cents to yield 1.003 percent and the benchmark 10-year
 up 41 Canadian cents to yield 1.745 percent.

 (Editing by Peter Galloway)