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Oct 25, 2017

Canadian dollar hits 3-month low on dovish Bank of Canada

Bank of Canada leaves key rate unchanged, says it will be 'cautious' with future hikes

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The Canadian dollar tumbled to a more than three-month low against its U.S. counterpart on Wednesday, after a cautious Bank of Canada dampened expectations for another interest rate hike this year.

The Bank of Canada held its policy rate steady at one per cent, as expected, even as it said the economy was running at or near full capacity, signalling it was willing to let the economy run a little bit hot amid uncertainty over renegotiation of the North American Free Trade Agreement. 

"With the kind of language they used ... it makes you question whether they will be ready to move in December," said Jimmy Jean, senior economist at Desjardins Capital Markets.

Perceived chances of another hike by the end of the year fell to less than 30 per cent from 37 per cent before the rate decision, the overnight index swaps market showed. The central bank had hiked in July and September, the first rate increases in nearly seven years, after rapid acceleration in Canada's economy in the first half of the year.

At 4 p.m. ET, the Canadian dollar was trading at $1.2801 to the greenback, or 78.12 cents US, down one per cent. The currency's strongest level of the session was $1.2630, while it touched its weakest since July 12 at $1.2816. It has lost 5.8 per cent since posting a more than 2-year high in early September.    

Loonie will stay low through end of 2017: ForexLive

Adam Button, chief currency analyst at ForexLive, gives BNN his instant analysis on how the Canadian dollar will be impacted by the Bank of Canada's decision to hold. He says the dovish statement from the central bank indicates the chance of a December rate hike is close to zero per cent after today.

The price of oil fell after a surprising increase in U.S. crude inventories. U.S. crude prices settled 0.6 per cent lower at US$52.18 a barrel.

Canadian government bond prices were higher across a steeper yield curve, with the two-year up 5.5 cents to yield 1.466 per cent and the 10-year rising 18 cents to yield 2.043 per cent.

Canada's 2-year yield fell 5.4 basis points further below its U.S. equivalent to a spread of -13.7 basis points, after U.S. data pointing to strong business spending helped underpin U.S. Treasury yields.

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