January 22, 2014 / 5:56 AM / 4 years ago

Canadian dollar hits the skids while sterling surges

SYDNEY (Reuters) - The Canadian dollar wallowed at four-year lows early on Thursday after the Bank of Canada all but begged the market to sell the currency, while sterling took off as investors priced in an earlier start to rate hikes in the UK.

A money changer inspects U.S. dollar bills at a currency exchange in Manila January 15, 2014. REUTERS/Romeo Ranoc

The loonie traded at C$1.1086 per U.S. dollar after falling as far as C$1.1092 and bringing its decline this year to 4 percent. It fell nearly 7 percent for the whole of 2013.

The pound gained even more, jumping 1.8 percent to its highest since mid-2009 at C$1.8385. Sterling was on a tear after a sharp drop in UK unemployment added to the case for an early tightening.

In contrast the Bank of Canada took a leaf out of the Reserve Bank of Australia’s (RBA) play book and tried to talk down the loonie, saying a still strong currency posed an obstacle to exports. It also said it had become more concerned about weak inflation.

“It seems as though Governor Stephen Poloz may revert back to the BOC’s easing cycle as the persistent slack in the real economy continues to drag on price growth,” said David Song, analyst at DailyFX.

“At the same time, the BOC made it increasingly clear that a further depreciation in the Canadian dollar should further assist with the rebalancing of the real economy.”

That echoes the RBA which spent much of last year complaining about the strength of the Australian dollar. Its efforts played a part in a 14-percent slide in the currency.

The Aussie, however, appeared to have found good support below 88 U.S. cents and could build on that base after data on Wednesday showed surprisingly robust inflation at home.

Investors saw the outcome as greatly reducing the scope for another interest rate cut, driving the Aussie back up towards 89 cents. It was last at $0.8849.

Whether the Aussie can break above 89 cents depends on a closely watched report on China’s manufacturing sector due at 0145 GMT.

Any signs of a further slowdown in Australia’s single biggest export market could see the Aussie’s rebound come to an abrupt halt.

The other major currencies were trapped in familiar ranges overnight amid a lack of fresh impetus in the lead up to the Fed’s January 28-29 policy meeting.

There is talk the U.S. central bank will further reduce its bond-buying program as the world’s biggest economy continued to recover.

Such an outcome should provide a floor for the U.S. dollar, which firmed slightly against a basket of major currencies .DXY to be near a two-month peak set on Tuesday.

The euro eased to $1.3547, not far from a two-month trough of $1.3508 plumbed on Monday. Against the yen, the common currency was little changed at 141.63, while the dollar edged up to 104.55.

On Wednesday, the Bank of Japan dismissed the need for additional monetary easing, dampening expectations for more stimulus to offset the impact of a sales tax rise in April.

Editing by Chris Reese

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