The Canadian dollar fell to its weakest in more than 11 years on Monday, pressured by a slump in crude oil prices and the likely start of Federal Reserve monetary policy tightening next week, while longer-dated maturities led bond prices higher.
“The move lower in oil prices is weighing on the Canadian dollar,” said Andrew Kelvin, senior fixed-income strategist at TD Securities.
Crude oil futures tumbled to their lowest in nearly seven years on Monday after the Organization of the Petroleum Exporting Countries failed to address a growing supply glut.
U.S. crude prices settled at $37.65 a barrel, down 5.8 percent, while Brent crude lost 5.6 percent to $40.70 a barrel. [O/R]
Disappointing Canadian employment and trade data on Friday suggested the economy was off to a weak start in the final quarter of 2015 after just recently emerging from a mild recession.
“There’s every reason to expect the Canadian dollar to depreciate further versus the U.S. dollar ahead of what’s widely expected to be a rate hike in the U.S. next week,” said Kelvin.
The Canadian dollar ended the day trading at C$1.3513 to the greenback, or 74.00 U.S. cents, much weaker than Friday’s close of C$1.3377, or 74.76 U.S. cents.
The currency’s strongest level of the session was C$1.3363, while it hit its weakest since mid-2004 at C$1.3524.
Canadian government bond prices rallied, unwinding the selloff seen after last week’s European Central Bank meeting, according to Kelvin, while the selloff in crude oil weakened the outlook for growth and inflation.
European Central Bank President Mario Draghi has brushed off negative reaction to new stimulus measures, saying on Friday that the ECB could deploy more stimulus if needed.
The two-year price rose 5.5 Canadian cents to yield 0.601 percent and the benchmark 10-year was up 56 Canadian cents to yield 1.518 percent.
The curve flattened, as the spread between the 2-year and 10-year yields narrowed by 3.4 basis points to less than 92 basis points, indicating outperformance for longer-dated maturities.
The Canada-U.S. two-year bond spread was 1.6 basis points wider at -33.4 basis points, while the 10-year spread was 1.2 basis points wider at -70.7 basis points, as Canadian government bonds outperformed.
Bank of Canada Governor Stephen Poloz will speak Tuesday on “The Evolution of Unconventional Monetary Policy,” six days after the Bank of Canada held interest rates steady in its last rate decision of the year.