Loonie closes lower as Bank of Canada warns on debt

The Canadian dollar closed lower Wednesday as the Bank of Canada once again warned that rising household debt is one of the biggest weak spots in the economy.

The loonie ended 0.30 of a cent lower at 87.11 cents (U.S.) as traders digested the latest semi-annual financial system review.

In addition to rising consumer debt, the review warned of a potentially overvalued housing market, increased risk-taking in financial markets and emerging threats, such as weakening commodity prices and the plunging price of oil.

The bank also laid out possible pitfalls that threaten Canada's position, such as a sudden rise in long-term interest rates, increased financial stress in Europe and China, and a sharp correction in house prices. It reiterated, however, its expectation that Canada's housing market will have a soft landing.

And, despite the red flags, the economy continued to show signs of a "broadening recovery," the central bank said, adding that its overall assessment of Canada's financial stability remains roughly unchanged since the summer.

The lower loonie also reflected oil prices, which fell closer to the $60-a-barrel mark amid a weaker demand forecast from the OPEC cartel and signs of rising supplies in the U.S.

OPEC forecast that demand for its oil would drop to 28.9 million barrels a day next year, compared with 29.4 million barrels in 2014, the lowest amount in 12 years. The weaker demand comes in the face of increasing supplies, especially in the United States, and OPEC's decision last month to leave production levels unchanged.

Also, the U.S. Energy Information Administration said Wednesday that U.S. oil inventories rose by 1.5 million barrels last week. Analysts had expected a decrease of around three million barrels.

The price of oil has plunged about 40 per cent from mid-summer highs while markets work out a huge imbalance between supply and demand. On Wednesday, the January crude contract on the New York Mercantile Exchange dropped $2.88 to $60.94 a barrel.

Meanwhile, Iranian President Hassan Rouhani says the sharp fall in oil prices is the result of "treachery" – an apparent reference to regional rival Saudi Arabia, which opposed production cuts to lift prices.

Elsewhere on commodity markets, metal prices declined with February gold down $3 to $1,229 an ounce after traders looking for a haven had pushed bullion up $37 an ounce on Tuesday.

March copper gave back most of Tuesday's 4-cent gain, down 3 cents to $2.90 a pound.