Loonie starts 2015 at 5-1/2-year low

The Canadian dollar dived to a more than 5-1/2-year low against the greenback on Friday, striking a weak tone at the start of 2015 as it took hits from a rally in the US dollar and another drop in oil prices. Traders returned to their desks to take the loonie resoundingly lower after it had drifted higher in light holiday volume earlier this week. Investors bet that many of the themes that battered the currency in 2014 were still intact, including the likelihood that the US Federal Reserve will raise interest rates this year.
The loonie shed more than 1 percent, adding to the 8.6 percent loss it racked up for 2014. Anticipation that the European Central Bank will take more aggressive steps to loosen monetary policy later this month added to the favour the market is bestowing on the US dollar and highlighted the divergence between monetary policy at the Fed and in much of the rest of the world.
A paper from a Fed official earlier this week said a forecasting tool developed by the central bank recommends rates should be hiked immediately. The Bank of Canada is not expected to raise rates until after the Fed does, putting more pressure on the loonie. "As policy divergence happens, it's happening further and more violently than has been priced in, so there's more room to go in the US dollar rally," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
The Canadian dollar ended the North American session at C$1.1762 to the greenback, or 85.02 US cents, weaker than Wednesday's official close from the Bank of Canada of C$1.1601, or 86.20 US cents. The loonie finished near its session lows, putting it at its lowest level since May 2009. While the next level to watch will be C$1.18, there is a risk the currency sees a temporary push to C$1.20, Sutton said.
A decline in the price of oil also hurt the loonie, with crude ending down 58 cents at $52.69 a barrel. Whether oil will see another significant plunge is a risk for Canadian dollar forecasts this year, as oil is a major export for Canada. Canadian government bond prices were higher across the maturity curve, with the two-year up 1-1/2 Canadian cents to yield 1.003 percent and the benchmark 10-year up 41 Canadian cents to yield 1.745 percent.