BUSINESS

Canadian dollar lower amid subpar economic performance during August

10/31/2014 08:49 EDT | Updated 12/31/2014 05:59 EST
TORONTO - The Canadian dollar dropped almost two-thirds of a U.S. cent Friday as economic growth for August missed already modest expectations. The loonie was also under pressure amid a move by the Bank of Japan to stimulate the world's third-largest economy.

The loonie was down 0.6 of a cent to 88.72 cents US as Statistics Canada reported that gross domestic product dipped 0.1 per cent in August against a flat showing that economists had expected.

TD Economics said that the report was "consistent with real GDP growth tracking around two per cent annualized for the third quarter."

That represents a marked slowdown from the 3.1 per cent increase recorded in the second quarter "but it's still respectable," TD said.

Meanwhile, markets were surprised overnight as the Bank of Japan expanded a key stimulus program.

The bank will increase its purchases of government bonds and other assets by between 10 trillion yen and 20 trillion yen (US$91 billion to $181 billion) to about 80 trillion yen (US$725 billion) in total annually.

Bank governor Haruhiko Kuroda said the increase was required to prevent a reversal into a "deflationary mindset" that the country's leaders contend has stymied growth for many years. The bank judged the move necessary in the wake of weakening consumer demand following a consumption tax hike and the recent substantial decline in oil prices, which have been exerting downward pressure on inflation.

The move by the Japanese central bank comes at a point when the U.S. Federal Reserve is winding up its marquee stimulus program. The Fed's quantitative easing program has been a fixture since the 2008 financial crisis.

It announced Wednesday that the third such QE exercise would end at the end of October.

Gold prices have been a major casualty of the Fed move. That is because the QE program of massive bond purchases had elevated inflation concerns. Traders had bought into gold as an inflation hedge but the program is now wrapping up and inflation is tame in most parts of the world.

On Friday, the December bullion contract dropped $27 to US$1,171.60 an ounce on top of a $26 slide Thursday.

Also working against gold and other commodity prices has been a U.S. dollar that strengthened following the Fed's decision and moved higher against other currencies Friday following the Bank of Japan announcement. A stronger greenback makes it more expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.

December crude oil fell 58 cents to US$80.54 a barrel and December copper added to Thursday's four-cent decline, down two cents at US$3.05 a pound.

At the same time, currency analysts are pointing out that the Bank of Japan move has the potential to spark a currency war.

The yen fell sharply following the Bank of Japan announcement and "a weaker yen is clearly part of the (bank's) strategy," said Camilla Sutton, chief FX Strategist, managing director, Scotiabank Global Banking and Markets.

"A weaker yen has significant implications for the other Asian currencies in the region (and) a weaker yen, combined with a weaker euro, have negative growth implications for the U.S."