BUSINESS

Loonie Tanks Over Four Words From Bank Of Canada Governor

01/18/2017 05:26 EST | Updated 01/18/2017 09:33 EST

TORONTO — A suggestion from the head of Canada's central bank that an interest rate cut "remains on the table" sent the Canadian dollar down more than a full U.S. cent on Wednesday.

The loonie lost 1.16 U.S. cents to 75.42 cents US, as it also felt the weight of falling crude prices and a strengthening greenback.

It has been a volatile two days for the Canadian dollar, which had gained nearly two-thirds of a U.S. cent on Tuesday after comments from Donald Trump hinted the president-elect may be in favour of a weaker U.S. dollar.

On Wednesday, the loonie started to soften during a news conference by Bank of Canada governor Stephen Poloz where he said an interest rate cut was still possible if the Canadian economy deteriorates amid uncertainty surrounding Trump's policies.

stephen poloz

Stephen Poloz, governor of the Bank of Canada, listens during a press conference in Ottawa, Ontario, Canada, on Wednesday, July 13, 2016. (Photo: David Kawai/Bloomberg via Getty Images)

In its latest monetary policy report, the bank announced that it was keeping its key interest rate unchanged at 0.5 per cent, where it has been since July 2015.

It also warned that there would be "material consequences'' for trade if protectionist policies come into effect under Trump.

"We identified a number of downside risks as well as upside risks in our projections. But should any of those downside risks materialize and put our inflation target at risk, then we would have the room to manoeuvre," Poloz told reporters in Ottawa.

"In that context, especially with inflation being below target for a prolonged period, yes a rate cut remains on the table and it would remain on the table as long as those downside risks are still present."

"The band of uncertainty has certainly increased in 2017 and it's comforting to know that the Bank of Canada is not only paying attention but also willing to act."

This isn't the first time the Canadian dollar has fallen sharply due to comments about a possible rate cut. The currency had declined but then quickly recovered during a session in mid-October after Poloz had revealed that a rate cut was under consideration.

Cynthia Caskey, a portfolio manager and vice president at TD Wealth, says financial markets should take solace in the bank's decisiveness if conditions begin to warrant a move.

"The band of uncertainty has certainly increased in 2017 and it's comforting to know that the Bank of Canada is not only paying attention but also willing to act," she said.

Markets mixed

North American stock markets were mixed, as the S&P/TSX composite index in Toronto fell 43.51 points at 15,397.85.

On Wall Street, the Dow Jones industrial average was down a moderate 22.05 points to 19,804.72, while the S&P 500 gained four points to 2,271.89. The tech-heavy Nasdaq composite was ahead 16.92 points at 5,555.65.

In commodities, the February crude contract lost $1.40 to US$51.08 per barrel and February natural gas was down 11 cents at US$3.30 per mmBTU.

The February gold contract lost 80 cents to US$1,212.10 an ounce and March copper contracts were down a penny at US$2.61 a pound.

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