Dollar drops as central bank "hints" as it may cut interest rate

The Canadian dollar retreated towards parity with the U.S. greenback Monday in the wake of a "hint" of an interest rate cut by Bank of Canada governor David Dodge.

The central bank seems to be preparing the market for an interest rate cut, Scotiabank currency strategist Stephen Malyon said Monday, citing weekend comments by Dodge that the central bank, in setting policy, will have to take into account the increased risks that the global economy will be weaker than expected.

"This appeared to be another step designed to prepare the market for a rate cut at an upcoming meeting," Malyon said, noting that last week senior deputy governor Paul Jenkins also warned of the risks to the Canadian economy posed by the strong currency.
The Canadian dollar fell 1.3 cents US to a near six-week low of $1.0155 US, down from $1.0285 US on Friday, and down from what was a modern-day high of more than $1.10 US earlier this month.

John Johnston, chief strategist at RBC's The Harbour Group said it's standing by its view that a sustained expansion is the most likely outcome of the current financial and economic turbulence.

"However, markets are suggesting a U.S. downturn with important spillover into other economies, notably Canada, is more likely," Johnston added. "In fact, it looks like markets are very close to fully discounting a U.S. recession."

And as a result, the correction in the Canadian dollar currently underway could take the currency down farther than may expect to less than 95 cents US and oil prices closer to $70 US.

The latest fall in the currency was despite news of surprisingly strong wholesale sales, which Statistics Canada reported rose by 1.1 per cent in September to $43.7 billion, while analysts had been anticipating no increase.

"This will add favourably to September GDP," said TD Securities economist Millan Mulraine, noting that the details of the report suggest broad-based strength, with 12 of the 15 categories of sales rising.

The stronger-than-expected wholesale report, however, was not enough to prompt J.P. Morgan to change its forecast that the overall economy actually shrunk in September and that growth in the third quarter slowed to less than two per cent.

TD Bank, in releasing its weekly commodity price index, noted oil prices fell last week for the first time in seven weeks on signs of an improving supply situation. However, last week's retreat in the dollar resulted in a 4.1-per-cent weekly gain in the Canadian dollar value of commodity prices, mostly priced in U.S. dollars.

CIBC World Markets said that while the Canadian dollar has fallen more against the U.S. dollar in the past week than any other currency, this masks the fact that so far this year it has appreciated more against the greenback than any other currency.

"Oil aside, the markets may also be rightly reassessing just how strong a loonie even commodities-levered Canada can live with," it said.

Concerns about future economic weakness were also blamed for another steep drop in Canadian stocks. The TSX fell more than 180 points, a weak start to the week following two straight weekly losses.

(prepared by Eric Beauchesne/Vancouver Sun)