Canadian dollar hits two-month low ahead of rate decision as trade deficit jumps

TORONTO (Reuters) - The Canadian dollar weakened to a two-month low against its U.S. counterpart on Wednesday ahead of an interest rate decision by the Bank of Canada, as oil prices fell and the government reported a record high trade deficit in December.

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 deficit widened to C$4.59 billion from a revised C$1.98 billion in November as slumping crude prices cut the value of exports by 3.8 percent, Statistics Canada said.

The price of oil, one of Canada’s major exports, fell as bullish output forecasts by two big U.S. producers and a build in U.S. crude stockpiles outweighed OPEC-led production cuts. U.S. crude oil futures were down nearly 1 percent at $56.02 a barrel.

The Bank of Canada is widely expected to hold rates steady, with the majority of analysts anticipating one more hike in 2019, though recent data has clouded the outlook and could force a more dovish tone. The interest rate decision is due at 10 a.m. (1500 GMT).

At 8:36 a.m. (1336 GMT), the Canadian dollar was trading 0.2 percent lower at 1.3383 to the greenback, or 74.72 U.S. cents. The currency touched its weakest level since Jan. 4 at 1.3391.

The decline for the loonie came as China’s foreign ministry said that the country’s customs officials had frequently discovered “hazardous pests” in samples taken recently from Canadian canola imports.

The comment came after Reuters reported that China had canceled Canadian agribusiness Richardson International Ltd’s registration to ship canola to China, the world’s top importer of the oilseed.

Still, currency strategists expect the Canadian dollar to strengthen over the coming year as rising investor appetite for risk counters a slowdown in the domestic economy that could deter the Bank of Canada from raising interest rates, a Reuters poll showed.

Canadian government bond prices were higher across the yield curve, with the two-year up 4.4 Canadian cents to yield 1.715 percent and the 10-year rising 26.5 Canadian cents to yield 1.848 percent.

The gap between Canada’s 10-year yield and its U.S. equivalent widened by 2.1 basis points to 86.3 basis points in favor of the U.S. bond, the widest gap since January 2016.

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

Reporting by Fergal Smith; Editing by Steve Orlofsky