Canadian Dollar Tumbles After Bank of Canada Cuts Rates

By Nirmala Menon 

        OTTAWA--The Canadian dollar slumped to its lowest point in over five years after the Bank of Canada's shock interest-rate cut Wednesday, a decision that saw the greenback breach two key psychological barriers and come within a hair's breadth of a third.
        The U.S. dollar pieced the C$1.2100 and C$1.2200 levels, spiking to an intraday high of C$1.2395, and was most recently at C$1.2334, up sharply from C$1.2114 at Tuesday's close, according to data provider CQG.
        Those are levels unseen since April 2009, when the economy was mired in recession.
        The Bank of Canada lowered its benchmark overnight rate by a quarter point to 0.75%, its first reduction since April 2009, bringing an end its longest rate pause in almost 60 years.
        The central bank said it took action as "insurance" against the potential economic toll of slumping prices for oil, a key Canadian export, and became the first Group of Seven monetary authority to take such action in response to the oil plunge.
        All major forecasters had predicted the central bank would keep interest rates steady. The predominant view was that its next policy move would be to raise rather than cut rates.
        The unexpected rate cut created a great deal of volatility across all Canadian financial assets, said Blake Jespersen, managing director of foreign exchange at BMO Capital Markets.
        "It was a very dramatic and surprising move by the Bank of Canada," he said. "Now everybody is readjusting forecasts, both for interest rates and the currency in Canada."
        There is "definitely a risk" that the central bank "could ease further" if oil prices stay below the $60 a barrel mark it used in making its latest economic projections, said Bank of America Merrill Lynch economist Emanuella Enenajor.
        BMO's Mr. Jespersen said the Canadian dollar seems to have downward bias in light of the oil plunge and the potential for more rate cuts.
        "We could easily see C$1.2500 and potentially C$1.3000 in this environment," he said.
        The European Central Bank's policy decision is the next major event for financial markets. After the shocks from the Bank of Canada, and from the Swiss National Bank, which last week removed its currency cap, "I'm not sure how much more stress these markets can take," Mr. Jespersen said.
        Write to Don Curren at don.curren@wsj.com
        (END) Dow Jones Newswires

        January 21, 2015 17:39 ET (22:39 GMT)

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