Canadian Dollar Pauses 2020 Rally Against US Peer Amid Falling Crude Prices

The Canadian dollar weakened against its US peer to close out the trading week, with energy prices and producer prices coming into focus. The loonie is still on track to record a modest weekly gain against the greenback, but its overall 2020 performance in the foreign exchange markets has been remarkable.

According to preliminary estimates from Statistics Canada, the producer price index (PPI) slumped 0.6% in November, up from a 0.4% decline in October. This represented the second consecutively monthly slide. The drop in industrial producer prices was mainly driven by lower prices for lumber and other wood products.
The PPI edged up 0.1% at an annualized rate, making it the fourth straight monthly bump on a year-over-year basis.
In the third quarter, Canadian companies expanded their production capacity, bringing the capacity utilization rate to 76.5%, up from 70.7% in the second quarter. While the rate is still below pre-pandemic levels, most Canadian industries, especially manufacturing and construction, experienced a gradual recovery.
On Wednesday, the Bank of Canada (BoC) held its December policy meeting, where policymakers left interest rates unchanged at 0.25%. Officials also maintained their quantitative easing (QE) campaign with $4 billion in government and corporate bond purchases every week.
The central bank does not believe it will meet its 2% inflation target or raise rates until 2023, noting that the economic recovery will require monetary policy support for a few more years.
Lower energy commodities weighed on the loonie to finish the trading week. January West Texas Intermediate (WTI) crude oil futures fell $0.21, or 0.45%, to $46.57 per barrel. February Brent crude futures were flat at $49.98 a barrel.
Canada maintains a current account deficit, so exports are critical to economic expansion. With oil and gas remaining the country’s top exports, any change in prices — high or low — can affect the broader economy and the currency.
The Canadian bond market was red across the board. The benchmark 10-year bond fell 0.021% to 0.714%. The one-year note dipped 0.005% to 0.205%, while the 30-year bond slid 0.009$ to 1.266%.
The USD/CAD currency pair advanced 0.23% to 1.2771, from an opening of 1.2741, at 18:59 GMT on Friday. The EUR/CAD was unchanged at 1.5469.
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