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Canadian Dollar Sinks to 1-month Low amid BOC Rate Decision

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Canadian Dollar Sinks to 1-month Low amid BOC Rate Decision

The Canadian dollar declined for a third consecutive day, hampered by dovish sentiment from the Bank of Canada, which announced today it would keep its overnight rate unchanged.

The loonie sunk to an intraday low of 0.9129 US before rebounding slightly to 0.9138, declining 0.31 percent. This was the Canadian currency’s weakest level in a month. The Canadian dollar has plunged nearly 1 percent against its US counterpart since May 30.

The Bank of Canada held its overnight rate at 1 percent, as expected, but repeated concerns about low inflation and weak exports, a sign the central bank was prepared to keep rates low for a prolonged period.

“The Canadian economy grew at a modest rate in the first quarter, held back by severe weather and supply constraints,” read the official BOC press release. “The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand.”

“Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before,” the Bank added.

The BOC did acknowledge the faster than forecast rise in inflation, but stressed this was likely due to temporary factors such as higher energy prices. Core inflation, which excludes volatile elements such as food and energy, remains well below the central bank’s target.

Canada’s annual inflation rate reached 2 percent in April for the first time in two years, raising optimism the BOC would give a more favourable view of the economy at today’s rate decision. However, disappointing first quarter GDP figures kept the Bank’s optimism in check. Canada’s gross domestic product accelerated just 1.2 percent annually, the government’s statistics department showed last month.

The labour market took another step backwards in April, as Canada reported the loss of nearly 29,000 jobs. Statistics Canada is expected to show on Friday the labour market rebounded in May with the creation of 25,000 jobs. The unemployment rate is forecast to remain at 6.9 percent.

The Labor Department will also release employment data Friday. Government economists are expected to show private payrolls rose 218,000 in May, after a 288,000 increase the previous month.

The loonie, which benefited from a weaker US dollar over the past month, is on its heels. As the BOC looks for more signs of growth from the country’s struggling export market, it may continue to “talk down” the loonie.

On the flipside, if the US Federal Reserve continues to taper bond purchasing at a steady rate, there is a real chance that a rate hike could enter the equation. The Fed has not yet outlined a detailed timetable for when it might consider adjusting interest rates, although officials talked about possible rate-hike strategies at last month’s policy meetings.

The Fed tapered bond purchasing by another $10 billion at the May meetings, reducing its holdings of US Treasuries and mortgage-backed securities to $45 billion.

The Canadian dollar is expected to be among the hardest hit currencies should the Fed signal for higher interest rates.

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