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Dollar could see further declines in wake of Bank of Canada rate announcement

By: Malcolm Morrison, The Canadian Press

Posted: 03/3/2013 5:01 AM | Comments: 0 | Last Modified: 03/3/2013 7:16 AM

The Canadian dollar could be under further pressure this week as traders look to see what the Bank of Canada signals about interest rates hikes and how job creation held up during February. (THE CANADIAN PRESS ARCHIVES)

TORONTO - The Canadian dollar could be under further pressure this week as traders look to see what the Bank of Canada signals about interest rates hikes and how job creation held up during February.

Currency and stock markets will also be looking to see how an automated series of steep U.S. government spending cuts is being implemented and what progress Italy is making in forming a new government following inconclusive results from an election last week.

The central bank makes its next announcement on interest rates on Wednesday.

No one expects the bank to change its key rate from one per cent but it could make subtle changes in the language of its statement about its interest rate intentions.

At its last meeting in late January, the bank indicated that interest rate hikes are likely further off than previously thought and lowered its economic estimates.

That was enough to push the loonie below parity with the greenback, where it has stayed ever since, falling to an eight-month low. And economists don’t expect it to rise above parity any time soon.

"We continue to look for the currency to work its way back toward parity eventually but I have no problems seeing it drop as low as 95 cents US in the next short while," said Doug Porter, chief economist at BMO Capital Markets.

"There are a lot of negatives suddenly stacked up against the currency short term, which could persist for awhile yet."

The central bank shaved three-tenths of a point off its projections for growth for both 2012 and 2013, to 1.9 per cent and 2.0 per cent respectively.

But that could be revised lower, given data released Friday showing fourth quarter growth came in at an annualized rate of 0.6 per cent, with growth actually contracting during December.

"I’m not pointing fingers here, it’s just the reality that they have been consistently optimistic and the economy has underperformed steadily and that’s been also true on the inflation front," added Porter.

"I think there is certainly a reasonable argument to be made that they will change the language."

The loonie has fallen by about three US cents since that last meeting, down 0.6 of a cent over the past week.

Continued low rates are one reason but the loonie has also fallen amid worries about the strength of the housing sector and the price differential between benchmark Brent crude and Western Canadian Select from the oilsands.

Traders have also been concerned about U.S. economic strength in view of automated, across the board U.S. government spending cuts of more than US$85 billion that were triggered Mar. 1.

The loonie has also been hit by weak December retail figures, tame inflation data for the end of the year, signs that the current account trade deficit remains at close to record levels and the latest indication of weak economic growth.

The other major piece of Canadian economic data comes out Friday, when the February jobs report is released.

"And of course the story there is that the Canadian jobs picture ended last year surprisingly strongly, and I think reality caught up with the job market a bit in January when we saw employment drop," said Porter.

"I think there's a chance we could see another weak report but I think the main story here is that the economy is going to struggle to turn out reasonable job gains through the first half of this year."

Economists anticipate job creation for February to come in at 8,000 after a plunge of 22,000 positions during January, with the jobless rate edging up 0.1 of a point to 7.1 per cent.

The U.S. government's employment report for February also comes out Friday. It is expected that the economy cranked out 155,000 jobs, roughly the same amount as January.

Meanwhile, North American stock markets ended last week with minor gains in the wake of better than expected U.S. readings on the manufacturing sector and consumer confidence.

The effects from the imposition of the so-called sequester will likely weigh on markets this coming week.

It's a strange situation since the cuts date from an agreement to raise the U.S. government debt limit in the summer of 2011. The program was not meant to be activated. Rather, lawmakers were supposed to come together before the March 1 deadline to agree on a more considered method of cutting government spending.

"The impact on sentiment and like consumer confidence and business confidence is going to be greater than the actually financial impact or impact on GDP," said Norman Raschkowan, North American strategist at Mackenzie Financial Corp.

"It has a far greater bearing on sentiment because what it’s going to lead to is people getting laid off for a month, or a couple of weeks, or something. Like government employees not getting a paycheque. There’s a ripple effect."

He says the outcome is likely that it means the economic recovery will continue to be weak.

It doesn’t mean the outlook is dire, it just means things will keep muddling along, grinding out those few yards.

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