The Canadian dollar fell the most in three months after the nation's central bank left interest rates unchanged while cutting its economic growth forecasts, saying the fallout from lower prices for crude oil, one of Canada's largest exports, will be felt for longer than projected.
The currency weakened against most major peers as the Bank of Canada said falling energy investment will hobble the economy through next year. The currency weakness is a reversal from Tuesday when it got a boost from the Oct. 19 election that saw Justin Trudeau's Liberal Party sweep into power on promises for deficit-funded stimulus spending.
"Forecasts for growth are lower, and while not terribly pessimistic, it's not terribly optimistic either," said Jack Spitz, the managing director for foreign exchange at National Bank of Canada.
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the $1 coin, fell 1.2 per cent to $1.3139 per U.S. dollar as of 5 p.m. in Toronto. It was the biggest decline since July 15 and reached the weakest level since Oct. 2.
Canada's benchmark 10-year government bond, a traditional haven for skittish investors, rallied after the news. The 2.25 per cent security maturing June 2025 added 76 cents to $107.08. The yield, which moves inversely to prices, fell eight basis points, or 0.08 percentage point, to 1.46 per cent.
The benchmark rate on overnight loans between commercial banks remained at 0.5 per cent, the central bank said in a decision Wednesday from Ottawa. Policy makers cut their 2016 growth forecast to 2 per cent, from 2.3 per cent, saying capital spending by oil and gas firms will probably fall 20 per cent next year as prices remain weak.
The drop in oil prices to about $50 a barrel will cut three-quarters of a percentage point off Canada's growth rate this year, leaving it at 1.1 per cent, the central bank said. It added that a recovery has already started with exports outside of commodities boosted by interest-rate cuts in January and July and a weaker dollar.
"Global economic growth has been a little weaker than expected this year, but the dynamics pointing to a pickup in 2016 and 2017 remain largely intact," policy makers led by Governor Stephen Poloz said in a statement.