Canadian Dollar Weakens as Central Bank Cuts Borrowing Costs

By Chris Fournier

Jan. 20 (Bloomberg) -- Canada’s currency fell after the central bank cut its target lending rate by half a percentage point, crude oil fell below $33 and the U.S. dollar rallied against most major currencies.

“The Canadian dollar is still weighed down by global issues,” said Firas Askari, head currency trader in Toronto at BMO Nesbitt Burns, a unit of Bank of Montreal.

The Canadian dollar fell 0.7 percent to C$1.2622 per U.S. dollar at 10:12 a.m. in Toronto, from C$1.2539 yesterday. One Canadian dollar buys 79.23 U.S. cents.

The loonie, as Canada’s dollar is known, fell as much as 1.3 percent after the Bank of Canada slashed its key interest rate to 1 percent, the lowest since the bank was established in 1934. Nineteen of 20 economists surveyed by Bloomberg News predicted the reduction. The bank signaled more cuts may be needed.

“The statement appears to leave the door open for additional easing,” said George Davis, Toronto-based chief technical analyst at RBC Capital Markets. “I don’t think this does anything to unravel or change the uptrend” that the U.S. dollar is in right now versus the Canadian dollar.

The U.S. Federal Reserve cut its target rate for overnight loans between banks in the U.S. to as little as zero in December.

The U.S. dollar rose against all the 16 most actively traded currencies, except for the yen. The Japanese currency tends to strengthen during times of economic turmoil as investors unwind purchases of higher-yielding assets financed with the yen.

‘Great Guns’

“The U.S. dollar is going great guns,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets and the largest Canadian-based currency trader. Falling oil prices are also weighing on the Canadian dollar, Watt said.

Canada’s currency will strengthen to C$1.20 against the U.S. dollar by the end of 2009, according to the median forecast in a Bloomberg News survey of 34 economists. RBC predicts the currency will weaken to C$1.31 by the end of next quarter.

The Canadian central bank has cut its target rate eight times since December 2007 from 4.5 percent. That combined with the fiscal stimulus governments in both the U.S. and Canada will announce later this month “may bear fruit by the end of 2009,” Paul-Andre Pinsonnault, a senior fixed-income economist at National Bank Financial in Montreal, a unit of Canada’s sixth largest bank, said in an interview before the decision.

More Rate Cuts

“Markets were anticipating a little bit more, perhaps 75 basis points,” said Martin Lefebvre, a senior economist at Montreal’s Desjardins Group, Quebec’s largest credit union. “The bank is calling for more rate cuts, but still it seems they’re not as dovish as some would have anticipated.”

Canada’s currency, dubbed the loonie for the aquatic bird on the one-dollar coin, has weakened 3.3 percent this year after losing 18 percent last year, its worst annual performance. A global recession decimated demand for raw materials such as oil, gold and copper, which account for about half the country’s export revenue.

Crude oil for February delivery fell to $32.70, down 10.4 percent from last week’s close and the lowest since Dec. 19, on the New York Mercantile Exchange today.

The yield on the two-year government bond rose one basis point, or 0.01 percentage point, to 1 percent. The price of the 2.75 percent security due in December 2010 fell 2 cents to C$103.21.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net