Loonie lower, interest rate cut can't be ruled out

Slower than normal growth may be the new norm

TORONTO – The Canadian dollar fell heavily for a second day Wednesday after Bank of Canada governor Stephen Poloz struck a decidedly dovish tone on interest rates while markets wondered who will replace Jim Flaherty as finance minister.

Flaherty made the surprise announcement that he was stepping down after markets closed Tuesday and there is much speculation he will be replaced by Natural Resources Minister Joe Oliver.

The loonie dropped 0.3 of a cent to 89.49 cents US early Wednesday after tumbling 0.68 of a cent on Tuesday after Poloz said that slower than normal growth may be the new norm. He said in a speech to a business audience that will require central bankers to keep interest rates low for longer than they would have in the past.

And in a question and answer session, he added that a rate cut by the Bank of Canada could not be ruled out.

Meanwhile, a forecast from Royal Bank is predicting that economic growth should hit 2.5 per cent this year, despite a weak start to 2014 caused by severe winter weather, with growth picking up to 2.7 per cent in 2015.

That’s slightly stronger than the Bank of Canada’s call for 2.5 per cent growth in both years.

RBC also says the loonie will trade at about 87 cents US by the end of this year and dip to 85 cents by the end of 2015.

Traders also looked to the outcome of the interest rate meeting of the U.S. Federal Reserve.

Markets widely anticipate the Fed will announce that it deems the economy strong enough to further cut its monthly bond purchases by another US$10 billion to $55 billion.

It is further expected that the central bank will deemphasize the importance of the jobless rate figure as a policy guide for determining when the Fed might hike interest rates.

Finally, traders want to hear the Fed’s take on how much damage was inflicted on the economy by severe winter weather in January and February.

Markets also monitored geopolitical developments a day after Russian President Vladimir Putin said his country doesn’t want to annex more of Ukraine. He made the comment as he signed a bill to annex Crimea after the territory’s residents voted overwhelmingly to break away from Ukraine.

Western governments, including Canada, have responded with sanctions that target a variety of people in Russia, Ukraine and Crimea.

On the commodity markets, April crude on the New York Mercantile Exchange edged 24 cents higher to US$99.94 a barrel.

Metal prices also retreated with the May copper contract in New York down two cents to US$2.93 a pound while optimism that the Ukraine crisis won’t worsen pushed gold prices down for a third day. April bullion faded $11.60 to US$1,347.40 an ounce.