Canadian dollar weakens as Bank of Canada counsels caution, oil retreats

Bank cites weaker global growth, shrinking business investment
By Fergal Smith
||Last Updated: 04/14/2016

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as oil prices retreated and after the Bank of Canada counseled caution on the country's growth outlook.

The central bank kept interest rates steady, saying weaker global growth, a less favourable U.S. outlook and shrinking business investment would have driven the economic outlook lower if not for the boost from the government's fiscal stimulus.

"They accentuated almost every negative they could," said Doug Porter, chief economist at BMO Capital Markets.

The loonie has rebounded 15 per cent since hitting a 12-year low in January, triggering concern among some analysts that its recovery will choke off exports.

That risk was not lost on Bank of Canada Governor Stephen Poloz. At a press conference following the interest rate announcement, he said the stronger currency can put at risk rotation of the economy toward non-resource growth.

Still, the implied probability of a Bank of Canada rate cut this year has dropped to less than 10 per cent from more than 50 per cent at the start of March. 

U.S. crude prices settled at $41.76 a barrel, down 0.97 per cent, as comments from Russia's energy minister added to doubts that a producer meeting set for Sunday would yield a positive outcome.

The "risk-reward" profile does not favor buying Canadian dollars ahead of Sunday's meeting, said Dean Popplewell, chief currency strategist at OANDA. Orders to buy U.S. dollars start to step up around the $1.2500 psychological threshold, he added.

The Canadian dollar ended at $1.2815 to the greenback, or 78.03 U.S. cents, weaker than Tuesday's close of $1.2759, or 78.38 U.S. cents.

The currency's weakest level was $1.2828, while it touched its strongest since July 15 last year at $1.2744.

Risk appetite rose after surprisingly upbeat Chinese trade data offered hope Asia's biggest economy is finally stabilizing.

However, lower U.S. retail sales in March added to evidence that economic growth stumbled in the first quarter.

Canadian government bond prices were higher across the maturity curve, with the two-year price up two Canadian cents to yield 0.573 per cent and the benchmark 10-year rising 41 Canadian cents to yield 1.247 per cent.

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