The Canadian dollar slumped to a one-week low against its U.S. counterpart on Wednesday as oil fell and Bank of Canada Governor Stephen Poloz kept alive prospects of an interest rate cut.
A rate cut remains "on the table" if the risks facing the country are realized, the Bank of Canada said, warning there would be "material consequences" if U.S. President-elect Donald Trump enacts protectionist policies.
"The market understood that even though [the central bank] revised its forecast higher that it still had a rate cut at the back of its mind," said Jimmy Jean, senior economist at Desjardins.
The Bank of Canada has not moved rates since July 2015 when it cut to 0.50 per cent.
The threat of additional easing pressured the loonie to its weakest since Jan. 11 at $1.3269 to the greenback.
It was at $1.3090 before Poloz spoke at a news conference following the central bank's rate decision.
Market participants who had got long Canadian dollars were forced to cover as the currency tumbled, said Michael Goshko, corporate risk manager at Western Union Business Solutions.
The loonie ended at $1.3259, or 75.42 cents US, much weaker than Tuesday's close of $1.3058, or 76.58 cents US.
On Tuesday, the loonie reached a nearly three-month high at $1.3019, helped by recent upbeat domestic data.
"I think what this [interest rate announcement] really hammers home is that they [the Bank of Canada] are in no mood to raise interest rates this year," said Andrew Kelvin, senior rates strategist at TD Securities.
The implied probability of a rate hike by the end of the year dipped to 37 per cent from 40 per cent before the announcement, data from the overnight index swaps market showed.
The U.S. dollar rose against a basket of major currencies, boosted by comments from Federal Reserve Chair Janet Yellen that suggested the U.S. central bank was ready to raise overnight interest rates quickly in the coming year.
U.S. crude prices settled US$1.40 lower at US$51.08 a barrel, pressured by a strong U.S. dollar and expectations that U.S. producers would boost output.
Oil is one of Canada's major exports. Canadian government bond prices were mixed across a steeper yield curve, with the two-year up 2.5 cents to yield 0.766 per cent and the 10-year falling 32 cents to yield 1.705 per cent.
The two-year yield fell 8.1 basis points further below its U.S. equivalent to a spread of -46.0 basis points, as Canadian government bonds outperformed.