TORONTO – After days of steep losses, the Toronto stock market elbowed its way back into the black Thursday while the Canadian dollar weakened amid speculation that the Bank of Canada will cut its key interest rate next week.
The Canadian dollar was locked below 70 cents U.S. all day despite a small bump in the price of oil, losing .08 of a cent to settle at 69.63 cents U.S.
In recent weeks, the commodity-sensitive loonie has plunged as has oil, both of which have dropped to levels not seen since 2003 on concerns about a supply glut and a slowing Chinese economy.
Oil rose 72 cents to US$31.20 a barrel, but that’s still marks an 18 per cent slide since Christmas Eve.
Craig Jerusalim, portfolio manager at CIBC Asset Management, said that while the declining oil price has dragged down the loonie, the currency’s weakness over the past month is due more to the widening gap in monetary policy between Canada and the United States.
The Bank of Canada has cut interest rates twice over the past year, and some market watchers are anticipating another cut next Wednesday.
At the same time, the U.S. Federal Reserve has made positive statements about the recovering American economy and raised its own benchmark interest rates in December from the near-zero levels they had held since the financial crisis.
“We had a long period of time where the Canadian dollar overshot on the upside when it was trading well above par, and now we are likely trading well below a fair fundamental value,” he said.
Predictions of a loonie below 65 cents U.S. or oil at US$20 a barrel are overstating the case, he said, but market sentiment will remain negative until oil prices stabilize and the Bank of Canada clears up speculation about its monetary policy.
“As long as the expectations are that the Bank of Canada is going to cut while the Fed is going to raise interest rates, the Canadian dollar could overshoot on the downside,” Jerusalim said.
The S&P/TSX composite index ended the day up 165.62 points at 12,336.03, though it remains beaten down from heavy losses suffered over the last two weeks, including a 200-point loss on Wednesday.
Even with Thursday’s triple-digit gain, the Toronto market has lost more than 900 points, or 7.1 per cent, since the Christmas break.
“It’s been a tough start to the year for equity markets, with what feels like one step forward and two steps back,” Jerusalim said.
New York markets posted gains on the day, although both the S&P 500 index and the Dow Jones average have fallen by about 7.8 per cent since the first day of trading after Christmas.
The Dow Jones rose 227.64 points to close at 16,379.05, the S&P 500 added 31.56 points to 1,921.84 and the Nasdaq gained 88.94 points to close at 4,615.00.
In other commodities, February natural gas declined 13 cents to US$2.139 per mmBtu and February gold lost $13.50 to US$1,073.60 an ounce.