Loonie closes below parity on signal that rates won't rise this year

TORONTO – The Canadian dollar closed below parity with the greenback for the first time in more than two months Thursday in the wake of the Bank of Canada’s signal that interest rate hikes are likely further off than previously thought.

The loonie declined 0.39 of a cent to 99.71 cents US on top of a drop of almost two-thirds of a cent Wednesday as the central bank kept its key rate at one per cent and lowered its economic estimates.

The bank has shaved three-tenths of a point off its projections for growth for both 2012 and 2013, to 1.9 per cent and 2.0 per cent respectively.

The change in the guidance likely means the Bank of Canada won’t move to tighten borrowing costs until some time in 2014.

However, it’s not expected that this latest move below parity is anything but temporary.

Camilla Sutton, chief currency strategist at Scotia Capital, called the losses of the past couple of days a temporary repricing.

“The market has made some adjustments to their expectation in terms of the timing of the first rate hike in Canada,” she said.

However, she noted that the Bank of Canada is still far more hawkish or more likely to hike rates than the U.S. Federal Reserve “and that’s supportive of the Canadian dollar.”

She also said that the loonie will be supported by improving global growth and the favourable investor view of Canada.

“The flow should remain favourable into Canada this year and combined all together should create an environment where the dollar doesn’t rally to new highs but still rallies through parity and tests the highs we saw last year.”

The loonie peaked last year close to 104 cents US.

There was good news from the world’s second-biggest economy as China’s manufacturing crept higher in January to the fastest pace in two years. A preliminary version of HSBC’s monthly purchasing managers’ index rose for the fifth month in a row to 51.9 in January from 51.5 in December. Readings above 50 on the 100-point scale indicate an expansion.

The report is further evidence that China’s economy is undergoing a modest recovery from a downturn sparked by the 2008 world financial crisis.

Its economy expanded 7.9 per cent in the final quarter of last year, up from 7.4 per cent in the previous quarter. For all of 2012, the economy expanded 7.8 per cent, the slowest annual performance since the 1990s.

The Chinese data helped push oil prices higher.

The March crude contract on the New York Mercantile Exchange gained 72 cents to US$95.95 a barrel after falling $1.45 on Wednesday. The decline came after crude shipments through the Seaway pipeline from Cushing, Oklahoma, to refineries on the Gulf Coast had to be cut to less than half because of limited endpoint capacity.

Copper slipped one cent to US$3.68 a pound.

Gold bullion declined, with the February contract on the New York Mercantile Exchange down $16.80 to US$1,669.90 an ounce.