Canadian dollar hits two-month low as bets rise on BoC rate cut in 2019

TORONTO (Reuters) - The Canadian dollar weakened to its lowest in more than two months against the greenback on Thursday following a speech from a deputy governor of the Bank of Canada, as investors raised bets that the central bank may cut interest rates this year.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. The Canadian dollar strengthened against the U.S. dollar on Friday after Canadian CPI data showed an increase in core inflation. REUTERS/Mark Blinch

The Canadian economy is in for a longer-than-expected “detour” as consumer spending, business investment and the energy sector weigh, but economic growth is set to pick up later in 2019, Bank of Canada Deputy Governor Lynn Patterson said.

The speech came one day after the Bank of Canada held interest rates steady as expected and said there was “increased uncertainty” about the timing of future rate increases.

“Today’s speech by Deputy Governor Patterson did little to change the market’s dovish perception,” said Royce Mendes, a senior economist at CIBC Capital Markets. “The Bank of Canada will likely have to lower their sights even further in the months to come.”

Money markets have moved to price in about a 35 percent chance of an interest rate cut this year. Before Wednesday’s interest rate decision, the market had been pricing in a small chance of a hike.

At 2:54 p.m. (1954 GMT), the Canadian dollar was trading 0.1 percent lower at 1.3456 to the greenback, or 74.32 U.S. cents. The currency touched its weakest intraday level since Jan. 4 at 1.3460.

The loonie lost ground as the greenback rose against a basket of major currencies. The U.S. dollar currency index was boosted by a weaker euro, after the European Central Bank pushed out the timing of its first post-crisis rate hike to next year and offered banks new rounds of multi-year cash.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries and German bunds. The two-year rose 10 Canadian cents to yield 1.628 percent and the 10-year climbed 52 Canadian cents to yield 1.766 percent.

The two-year yield touched its lowest intraday since December 2017 at 1.620 percent.

The price of oil, one of Canada’s major exports, was supported by continuing OPEC-led supply cuts and U.S. sanctions against exporters Venezuela and Iran. U.S. crude oil futures settled 0.8 percent higher at $56.66 a barrel.

The value of Canadian building permits fell by 5.5 percent in January from December, Statistics Canada said. Analysts had expected a decrease of 5.0 percent.

Canada’s employment report for February is due on Friday.

Reporting by Fergal Smith; Editing by Lisa Shumaker