TORONTO – The Canadian dollar fell to its lowest level in more than six years on Wednesday after the Bank of Canada cut its key interest rate and lowered its forecast for the economy.
The loonie ended the day at 77.40 cents US, down 1.09 cents from the previous day’s close, a level not seen since March 2009 when Canada was in the midst of a deep recession.
Stephen Carline, managing director and head of equities at CIBC Asset Management, said the move wasn’t entirely unexpected, although some market watchers had expected rates to remain flat.
The dollar’s slide, he said, mirrored the one following January’s rate cut.
“The reaction of the Canadian dollar relative to the U.S. dollar is not a big surprise,” he said.
The Bank of Canada cut its key interest rate by a quarter of a percentage point to 0.5 per cent on Wednesday, slashed its outlook for the economy and predicted a contraction in the second quarter due to lower oil prices and slumping exports.
In a speech in Washington, Federal Reserve chairwoman Janet Yellen said that the American central bank is likely to raise its own benchmark interest rates this year if the U.S. economy continues to improve.
Carline said the two central banks’ divergence on interest rates is likely to maintain the spread between the two currencies, as the American dollar remains more attractive to investors looking to make a return.
“There’s more demand for U.S. dollars than Canadian dollars,” he said.
Despite the fall in the Canadian dollar, the S&P/TSX composite index ended the day up 62.88 points at 14,662.88.
The Dow Jones industrial average was down 3.41 points at 18,050.17, the Nasdaq index fell 5.95 points to 5,098.94, and the S&P 500 dropped 1.55 points to 2,107.40.
The August crude contract was down $1.63 to US$51.41 a barrel.
Carline said the cheap Canadian dollar could be a boon for the country’s oil exporters, who pay their costs in Canadian currency and sell crude in U.S. dollars.
He said the biggest issue for the price of oil, which has fallen by more than half since July 2014, is oversupply. And with a deal on Iran’s nuclear program poised to add that country’s crude to the world supply, he said the problem isn’t going away any time soon.
“The problem with oil is a supply issue. Demand has actually been pretty good,” he said. “But we haven’t seen much in the way of reduced supply.”
On the commodity markets, the August gold contract fell $6.10 to US$1,147.40 an ounce while the August contract for natural gas rose 7.8 cents to US$2.92 per thousand cubic feet.