BUSINESS

Loonie Off To Weak Start In 2015 Amid Low Oil Prices

01/02/2015 09:15 EST | Updated 03/04/2015 05:59 EST
CP
TORONTO - The loonie plunged to a level not seen in more than five years Friday amid a strengthening U.S. greenback and weaker crude oil prices.

The Canadian dollar ended the day down 1.18 cents at 85.02 cents US. The last time it closed below this level was on May 15, 2009.

The currency finished 2014 down about eight per cent or 7.8 cents US against the American currency compared with where it began the year.

In contrast, the U.S. dollar strengthened last year as the Federal Reserve wrapped up its massive program of buying bonds and mortgage-backed securities, which has helped keep interest rates low.

The Fed is expected hike rates for the first time since the 2008 financial crisis in mid-2015. Expectations are the Bank of Canada will also move to hike rates sometime after that.

The Institute for Supply Management, a trade group of purchasing managers, reported that U.S. factory activity grew at the slowest pace in six months in December, weakened by declines in orders and production. Its manufacturing index fell to 55.5 in December from 58.7 in November.

Still, any reading above 50 signals expansion and, despite the slowdown, a measure of employment rose, suggesting factories likely added jobs last month.

Meanwhile, the loonie also continued to feel pressure from crude prices.

"Oil prices are flirting with their lows and remain an important weight (on the Canadian dollar)," observed Camilla Scott, chief FX strategist, global banking and markets, Scotiabank.

The February crude oil contract in New York faded 58 cents to US$52.69 a barrel.

Crude oil has been on a downward trajectory since its most recent high of US$107 a barrel back in June and has plunged more than 50 per cent since then due to low demand and a global supply glut.

Paul Vaillancourt of Fiera Capital said the loonie's performance is tied to oil prices but he projects both will rise in 2015.

"There's a clearly link between our currency and the price of oil and what investors think will happen to the Canadian economy," he said.

"Our view is short-term pain for long-term gain... (The loonie) will be hard hit in the short term, impacted with the price of oil but both the Canadian dollar and price of oil will revert back and we'll see the Canadian dollar back to 90 cents US by the end of the year."

Elsewhere on the commodity markets, February gold gained $2.10 to US$1,186.20 an ounce while March copper lost a penny to US$2.82 a pound.

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