Loonie slumps to four-year low

Just a few months after the Bank of Canada dropped its tightening rhetoric, speculation is growing that the central bank may be ready to adopt an easing bias.

USD/CAD topped C$1.10 for the first time in over four years today, with the currency pair lifted by expectations that the monetary policies of the two relevant central banks are headed in opposite directions.

The Bank of Canada will announce its rate decision tomorrow, with no change widely expected, but it is the central bank’s forward guidance that market participants will be closely following. The BOC currently has a neutral stance, with Governor Stephen Poloz having ditched predecessor Mark Carney’s tightening bias in a surprise move back in October.

The Loonie has been in a downward trend against its American counterpart since then, and the trend has picked up pace in 2014: USD/CAD has gained nearly 3% since the end of last year.

Such weakness in the Loonie will not be a concern to the Bank of Canada: a weak currency is a boon to such an export-driven economy, and given the surprisingly wide trade deficit reported earlier this month, it seems likely that Mr Poloz will strike a dovish tone in order to support exports.

While the Fed has been at pains to stress that accommodative will remain in place for an extended period, there is a growing expectancy that the next FOMC could see a reduction of a further $10 billion in the size of the central bank’s monthly asset purchases.

‘We're likely to continue on a path of gradual, measured reductions in the pace of purchases, assuming the economy tracks as we expect it to,’ the Wall Street Journal quotes San Francisco Fed President John Williams as saying earlier this month.

By mid-afternoon in New York, USD/CAD was up 0.27% at 1.0980.

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