Loonie drops to 6-year lows vs greenback; sharply lower vs euro, yen

On Wednesday the Canadian dollar plunged to six-year lows against the U.S. dollar on Wednesday after the Bank of Canada cut rates by 25 basis points in an unexpected move, as a response to the recent steep fall in oil prices.

“The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response” the bank said in a statement.

USD/CAD hit highs of 1.2275 immediately following the announcement, the most since April 2009 and was last at 1.2286, a gain of 1.39% on the day.

The loonie was also sharply lower against the euro and the yen, with EUR/CAD advancing 2.27% to 1.4305 and CAD/JPY falling 2.52% to 95.62.

The BoC reduced its overnight target rate to 0.75% from 1.0% previously. The consensus expectation had been for no change. The central bank said the recent rout in oil prices over the past six months would be negative for growth and underlying inflation in Canada. It expects lower oil prices to boost global economic growth, especially in the United States, while widening the divergences among economies.

The BoC announced it now expects economic growth to slow to about 1.5% and the output gap to widen in the first half of 2015. Inflation is also expected to fall below the bank’s target during the coming year, before moving higher again in 2016. The bank said consumer inflation was already reflecting the fall in oil prices.