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Loonie plunges below 72 cents US for first time since May 2004

The strength of the U.S. dollar and weak global commodities dragged down the Loonie


 

TORONTO – Lagging commodity prices and an interest rate hike south of the border have sent the loonie plunging below 72 cents US for the first time since May 2004, extending the Canadian currency’s recent string of 11-year lows.

The Canadian dollar lost 0.86 of a U.S. cent to close at 71.68 cents US on Thursday, a day after the U.S. Federal Reserve announced it was raising its key interest rates after holding them at near zero levels for the last seven years.

Ian Nakamoto, director of research at 3Macs, says rising rates in the U.S. hurt the loonie by drawing more funds south of the border, where investors are expecting a higher rate of return on interest-bearing products.

“The sense is that the U.S. is going to (further) increase rates in 2016 and Canada is probably going to leave the rate the way it is, so therefore that interest rate differential is going to be more in favour of the U.S.,” said Nakamoto.

The loonie has also been hurt by recent weakness in commodity prices. On Thursday, the February gold contract fell $27.20 to US$1,049.60 an ounce, while the January contract for benchmark crude oil was down 57 cents at US$34.95 a barrel.

March copper slipped three cents to US$2.04 a pound, while the January contract for natural gas declined 3.5 cents to US$1.755 per mmBtu.

A lower loonie typically provides a boost to the manufacturing sector by making Canadian goods cheaper for others to import.

“I know it hurts our national pride and all that, but it is what we need in terms of getting our economy back on its feet,” said Nakamoto.

“In the last 10 years it’s mainly been the energy sector that’s really driven growth in Canada. Now that appears to be gone, so we need the manufacturing sector to get the economy going.”

However, David Watt, chief economist at HSBC Bank of Canada, said the low value of the Canadian dollar also hints at weakening global demand for those very exports which support the loonie.

“If you want to be an optimist, you lean on the one side that it will help boost exports,” said Watt. “I tend to lean more to the second side, that it reflects a degree of concern about the global economy.”

On the equity markets, the S&P/TSX composite index fell 156.15 points to 13,009.93, led lower by the global gold and materials sectors, which declined 5.67 per cent and 3.73 per cent, respectively.

In New York, the Dow Jones average of 30 stocks gave back 253.25 points to 17,495.84, the broader S&P 500 index declined 31.18 points to 2,041.89 and the Nasdaq lost 68.58 points to 5,002.55.


 
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