Loonie Set for Steepest Weekly Drop in Year on Trade Tension

(Bloomberg) -- The Canadian dollar is heading for its worst week in a year amid worries that U.S. metal tariffs will further weaken economic growth that came in below expectations for the second half of last year.

The loonie fell 0.40 percent to C$1.2888 per U.S. dollar at 10:30 a.m. in Toronto, extending its year-to-date loss to 2.5 percent, the worst performance among major currencies tracked by Bloomberg. The currency has weakened in 10 of the last 11 sessions.

The Canadian dollar has been under pressure in recent weeks on concerns that negotiators will fail to reach an agreement to overhaul the North American Free Trade Agreement. President Donald Trump added to trade worries Thursday, pledging to impose tariffs of 25 percent on imported steel and 10 percent on aluminum. Canada is the largest exporter of steel to the U.S.

Meanwhile, data out on Friday showed Canada’s economy decelerated more than expected in the second half of last year, amid signs indebted households have begun to curb spending. The economy grew at an annualized pace of 1.7 percent in the fourth quarter, Statistics Canada reported, versus economist expectations for 2 percent growth. Third-quarter gross domestic product growth was also revised down.

Even as the loonie broke above its 200-day moving average this week, reinforcing the notion there’s more weakness to come, some market watchers believe the currency has sold off too much.

“A lot of bad news is priced in to the Canadian dollar at these levels,” said Shaun Osborne, Toronto-based chief foreign-exchange strategist at Bank of Nova Scotia. While the White House imposing tariffs on steel and aluminum imports “might be seen as a negative for the Canadian dollar initially, we think erecting trade barriers would work against the U.S. dollar in the longer run.”

The Bank of Canada will make its next interest rate decision on Wednesday after increasing the key rate three times since mid-2017 to 1.25 percent. All 14 economists surveyed by Bloomberg expect the rate to stay unchanged, with the market pricing in two to three more hikes later this year, according to overnight index swaps data. The odds of a rate hike for April have declined to 37 percent, from more than 60 percent last month.

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