Trade, politics and changing rates views send Canadian dollar sliding

LONDON: The Canadian dollar slumped to nearly six-week lows on Tuesday, hit by a combination of trade troubles, resignations from Prime Minister Justin Trudeau's cabinet and expectations the central bank could be on the cusp of changing its policy direction.

Global forex markets were overshadowed by the continued decline in volatility, lending a boost to higher-yielding currencies such as the U.S. dollar and emerging markets.

Focus has turned to meetings at the European Central Bank and the Bank of Canada, with both institutions facing the need to address stuttering economic growth and a slowdown in world trade.

The Canadian currency fell 0.3 percent to C$1.3350, extending Monday's losses on expectations that the central bank was approaching a policy turning-point.

The BoC is expected to hold rates this week at 1.75 percent but many reckon it is edging towards a cut later in 2019.

A month ago it was seen raising rates twice in 2019.

Charles St Arnaud, senior investment strategist at Lombard Odier, said the impact of rate rises on consumer spending had been underestimated. Question marks over oil exports and the trade slowdown were also concerns.

"The Bank of Canada are probably at the place where they are starting to feel concerned...I can see the Canadian dollar weakening a bit more as I think underperformance of the Canadian economy is not at an end," St Arnaud said.

Latest data showed Canadian growth slowed sharply to 0.4 percent on an annualised basis in the fourth quarter of 2018, versus the 1.2 percent forecast.

There were other concerns too, not least two cabinet minister resignations over the government's handling of a corruption scandal. That is roiling Trudeau's tenure months before an October election.

Ties with China are also under strain over trade and technology issues.

Elsewhere, the euro held near one-week lows versus the dollar at $1.1318 on expectations the ECB's Thursday meeting would hint at delaying hiking rates until next year and soon re-launch long-term bank loans to tackle economic slowdown.

"The ECB's new projections on Thursday might paint a more subdued picture than before," Commerzbank analyst Antje Praefcke said, adding the euro appeared to be "aiming for the $1.13 mark".

The U.S. dollar stood close to a two-week high against key peers at 96.726, supported by higher U.S. Treasury yields. It had rallied on Monday to 96.816, its strongest since Feb. 19.

Investors are seeking out higher-yielding currencies as price volatility in the world's most-traded currencies has plummeted following a dovish shift by major central banks.

Implied one-month vol on the euro is close to the lowest since 2014 while Deutsche Bank's Currency Volatility Index is near record lows of 6.66 hit in January, 2018.