Loonie sinks to three-year low against US dollar

The Canadian dollar has weakened today despite signs of labour market improvement, as the currency continues to be hampered by worries over economic growth and low inflation.

By mid-afternoon in New York, USD/CAD had risen 0.06%, heading for a third successive weekly gain, and after going as high as 1.0709 earlier in the session, the weakest the Canadian dollar has been against its US counterpart since the first half of 2010.

Statistics Canada announced today that the unemployment rate remained at 6.9% in November, its lowest since 2008, while 21,600 jobs were added to Canadian payrolls, up from 13,200 in October and much higher than had been expected. Many of these new jobs were part-time positions, however, with only 1400 full-time jobs added.

The 203,000 increase in US payrolls last month points to an ongoing trend of improvements in the US economy, which should rub off on Canada, as the US is its biggest trading partner.

The Loonie is under pressure though because of concerns over slowing inflation and lack of growth in exports, which have become an issue of focus ever since the Bank of Canada dropped its reference to a need for tightening from its October rate announcement.

The central bank noted in its latest announcement on Wednesday that non-commodity exports continue to disappoint, business investment is slower than anticipated and inflation has moved away from the BOC’s target.

The BOC previously maintained a tightening bias in order to combat elevated household imbalances. Crucially, in its latest statement, the central bank admitted the risks associated with these household imbalances have not materially changed, but it considers the risk of lower inflation to be even greater.

This suggests Canadian monetary policy is unlikely to be swayed by changes in the labour market until we see inflation begin to move back up towards target again.

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