Canadian dollar lower, traders look to Bank of Canada interest rate announcement

TORONTO – The Canadian dollar closed sharply lower Tuesday as a host of concerns continued to plague the loonie while the greenback strengthened amid a couple of strong economic reports.

The currency dropped 0.86 of a cent to 91.34 cents US as the U.S. Commerce Department reported retail sales rose 0.2 per cent last month, higher than the 0.1 per cent increase that economists expected.

Other data showed U.S. companies built up their stockpiles in November by 0.4 per cent as their sales improved. Continued growth in inventories suggested businesses believe consumers will increase spending in the months ahead.

The loonie has been under pressure recently from a rising trade deficit, a much worse than expected employment report for December and U.S. dollar strength based on the conviction that the Federal Reserve will continue to curtail its massive bond buying program throughout much of this year.

But the central bank’s dovish interest rate policy has also weighed on the currency as traders looked to next week’s interest rate announcement for further clues as to when it might hike rates — or even cut them.

“The market has pared back its expectations for an interest rate cut in Canada over the next 12 months from 38 per cent on Friday to just 21 per cent today,” observed Camilla Sutton, chief FX strategist and managing director with Scotiabank Global Banking and Markets.

“We do not expect the bank to move towards interest rate cuts in Canada, due to financial stability risks and accordingly do not expect any further interest rate cut risk priced in, which should help to stabilize the Canadian dollar.”

On the commodity markets, the February crude oil contract on the New York Mercantile Exchange gained 50 cents to US$92.30 a barrel.

The March copper contract was down one cent at US$3.34 a pound while the February gold bullion contract declined $5.70 to US$1,245.40 an ounce.