Loonie weakens as Bank of Canada stands pat Canadian Markets

By Myra P. Saefong, MarketWatch

SAN FRANCISCO (MarketWatch) — The Canadian dollar lost ground against the U.S. currency Wednesday after the Bank of Canada kept its overnight rate target at 1%, as expected.

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“The broad contours of the communiqué were roughly in line with [the central bank’s] previous statement, contrasting a weak international backdrop with a domestic economy that continues to grow broadly in line with potential,” wrote Mazen Issa, Canada macro strategist at TD Securities, in a note.

The Bank of Canada will likely remain on hold as far as policy goes for the rest of 2012, he said, but with the forward-looking language left unchanged, it will eventually recommence “tightening when international headwinds abate and domestic growth accelerates above potential.”

The central bank said Wednesday that it expects economic growth to pick up through 2013, and that “underlying momentum remains at a pace roughly in line with the economy’s production potential.”

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Following the Bank of Canada’s announcement, the country’s currency, also known as the loonie, was trading 0.4% lower versus its U.S. counterpart, with one U.S. dollar /zigman2/quotes/210561978/realtime/sampled USDCAD 0.0000% buying 99.01 Canadian cents, up from 98.64 Canadian cents on Tuesday.

The euro /zigman2/quotes/210561151/realtime/sampled EURCAD -0.0136% bought 1.2474 Canadian dollars, up from C$1.2385 Tuesday.

Overall, “the key drivers for the loonie right now lie outside of the country,” wrote Michael Woolfolk, managing director at Bank of New York Mellon, in a note, pointing out that the recent “drop in the USD and rise in crude-oil prices are helping to support the CAD.”

He expects the Bank of Canada to raise rates ahead of the U.S. Federal Reserve, which would lead to a stronger loonie. “However, that is a story for 2013 rather than 2012,” he added.

Christopher Vecchio, currency analyst at DailyFX, said the loonie has found support from strong housing-sector and labor-market growth throughout the past year, as well as the recent turnaround in U.S. growth prospects, given that the U.S. is Canada’s largest trading partner.

The loonie should strengthen from current levels, he predicted, and “barring a major tail-risk event that would spur immense U.S. dollar demand, we have the USDCAD finishing 2012” at 97.75 to 98.25 Canadian cents.

Equities edge up

In Toronto equities trading Wednesday, stocks finished higher. The S&P/TSX Composite Index /zigman2/quotes/210598478/delayed CA:GSPTSE +0.68% moved up 0.4% to close at 11,990.14, with strength seen in the natural-resource sector.

/zigman2/quotes/210598478/delayed GSPTSE 19,519.43, +131.71, +0.68%

The S&P/TSX Capped Diversified Metals and Mining index added 0.5% and the S&P/TSX Capped Materials index /zigman2/quotes/210598474/delayed XX:TORGC195 +0.77% gained 0.6%.

Inmet Mining Corp. rose 1.6% and Goldcorp Inc. /zigman2/quotes/225792379/delayed CA:G -5.93% saw its stock climb 1.1%.

Technology stocks ended lower, with the benchmark index for the sector /zigman2/quotes/210598463/delayed XX:TORGC194 +0.33% down 0.1% after spending the bulk of the session trading slightly higher. Shares of Research In Motion Ltd. shed 1.1% at $6.47, their lowest close since 2003.

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