How the loonie racked up its worst performance in six years in 2014

OTTAWA — The Canadian dollar firmed modestly against the greenback on Wednesday, finding some respite on the last day of a tough 2014 in which it racked up its worst performance in six years.

The Canadian dollar started the year as many investors’ top short position as the market expected the Bank of Canada to remain accommodative.

But after a selloff in the first three months, the loonie managed to regain some ground into the summer, only to be knocked lower again by the plunge in oil prices and a U.S. Federal Reserve that was moving closer to raising interest rates.

The Canadian dollar was down more than 8% for the year, its biggest decline since 2008, the start of the global financial crisis.

“It’s definitely been a challenging one for the loonie and is likely to continue into 2015,” said Scott Smith, senior market analyst at Cambridge Mercantile Group.

At the top of investors’ minds in 2015 will be expectations that the Fed will lift rates before the Bank of Canada does, which will spur the market to keep on favoring the greenback at the expense of the loonie.

The potential for another slide in oil prices is a big risk  for the currency as oil is a major export for Canada. Oil’s weakness continued on Wednesday with crude down US$1.10 at US$53.02 a barrel.

“The bet on the Canadian dollar is very much at this point in time a forecast on what happens for crude pricing,” said  Jack Spitz, managing director of foreign exchange at National Bank Financial.

“If you’re of the view that crude is effectively bottoming around these levels in the $50s, there’s reason to suggest that the Canadian dollar has bottomed out as well.”

It’s definitely been a challenging one for the loonie and is likely to continue into 2015

Despite oil’s drop on Wednesday, the Canadian dollar firmed, rising to a session high of $1.1565 before finishing at $1.1601 to the greenback, or 86.20 U.S. cents, according to the early official close from the Bank of Canada.

That was slightly stronger than Tuesday’s  $1.1607, or 86.15 U.S. cents.

Analysts said technical trading and year-end rebalancing in light volume were behind the loonie’s strength.

Canadian government bond prices were higher across thematurity curve, with the two-year up 1-1/2 Canadian cents to yield 1.009 % and the benchmark 10-year up 19 Canadian cents to yield 1.791 %.

© Thomson Reuters 2014

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