Canadian dollar tumbles as oil drops and domestic data disappoints

The Canadian dollar tumbled against its US counterpart on Friday, pressured by raised bets for a Bank of Canada rate cut as oil prices fell and domestic data disappointed. Canada's annual inflation rate in August dipped to a 10-month low and retail sales unexpectedly fell in July, disappointing markets and reviving talk that the Bank of Canada was more inclined to ease monetary policy than tighten.
The central bank may cut interest rates one more time if the Federal Reserve does not raise interest rates by year-end and if an anticipated rebound in Canada's economy does not materialize, said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management. The central bank last cut its policy rate by 25 basis points in July 2015 to leave it at 0.50 percent.
The implied probability of a Bank of Canada rate cut by mid-2017 jumped from less than 20 percent before the data to 40 percent, overnight index swaps data showed. A rate cut would weaken the Canadian dollar and help exports grow and may also help the domestic economy, Marjaee said. US crude oil futures settled $1.84 lower at $44.48 a barrel on signs Saudi Arabia and arch rival Iran were making little progress in achieving preliminary agreement ahead of talks by major crude exporters next week aimed at freezing production.
Oil is one of Canada's major exports. The Canadian dollar ended at C$1.3171 to the greenback, or 75.92 US cents, much weaker than Thursday's close of C$1.3062, or 76.56 US cents. The currency's strongest level of the session was C$1.3030, while its weakest was C$1.3181. For the week, the loonie rose 0.3 percent.
Speculators pared bullish bets on the Canadian dollar for the third straight week, Commodity Futures Trading Commission data showed. Net long Canadian dollar positions dipped to 16,303 contracts in the week ended September 20 from 17,058 contracts in the prior week. Canadian government bond prices were higher across the yield curve, with the two-year price up 8.5 Canadian cents to yield 0.525 percent and the benchmark 10-year
rising 57 Canadian cents to yield 1.04 percent. The 10-year yield fell 4.9 basis points further below its US counterpart, leaving the spread at -58 basis points, the largest gap in nearly six months, as Canadian government bonds outperformed on weaker-than-expected domestic data. EU ministers took steps to approve a contentious free trade deal with Canada.