Canadian dollar slides as Bank of Canada worries about trade developments

TORONTO (Reuters) - The Canadian dollar weakened against the greenback on Wednesday as expectations fell for further Bank of Canada interest rate hikes over the coming months after the central bank worried about trade policy developments.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

The Bank of Canada said that trade policy is an “important and growing source of uncertainty for the global and Canadian outlooks,” as it left its benchmark interest rate unchanged at 1.25 percent.

Canada sends 75 percent of its exports to the United States. Its economy could be hurt by an uncertain outlook for the North American Free Trade Agreement and planned U.S. tariffs on steel and aluminum.

The resignation of top U.S. economic adviser Gary Cohn could give free trade skeptics the upper hand in the White House.

“The real big issue is you still probably have another rate hike you have to price out for this year,” said Mark McCormick, North American head of FX Strategy at TD Securities. “It has been our view for the last month or so that two more hikes priced in this year is pretty aggressive.

The Bank of Canada has raised its benchmark interest rate three times since July. The amount of further tightening anticipated this year by money markets slipped to 44 bps from 50 basis points on Tuesday.

Canada’s trade deficit narrowed more than expected to C$1.91 billion in January as imports pulled back from a record high, but exports tumbled by the most in six months, data from Statistics Canada showed.

The price of oil, one of Canada's major exports, fell after U.S. government data showed an increase in inventories and as financial markets slid. U.S. crude CLc1 prices were down 2.8 percent at $60.84 a barrel.

At 12:21 p.m. EST (1721 GMT), the Canadian dollar CAD=D4 was trading 0.9 percent lower at C$1.2990 to the greenback, or 76.98 U.S. cents.

The currency matched Monday’s low at C$1.3002, which was its weakest since July 5.

Still, the Canadian dollar is forecast to rally over the coming year, a Reuters poll showed, as global economic strength and a broadly weaker greenback offsets investor fears of a trade war.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries on safe-haven buying as stocks fell.

The two-year CA2YT=RR rose 4.5 Canadian cents to yield 1.752 percent and the 10-year CA10YT=RR climbed 25 Canadian cents to yield 2.201 percent.

Canada’s employment report for February is due on Friday.

Reporting by Fergal Smith; Editing by Nick Zieminski and Susan Thomas