TORONTO - Worries about how Canada may be dragged down by a sinking U.S. economy sent the loonie into a bout of turbulence on Friday that briefly saw the currency plummet to its lowest point since mid-December.
The dollar ended the day below par at 99.87 cents US, down 1.05 cents from Thursday's close. Earlier in the session, the loonie slid as much as 1.27 cents to its lowest point in more than two weeks.
The loonie also fell against the British pound, Japanese yen and European euro.
The decline was motivated by dismal information from both a U.S. employment report and a Canadian purchasing managers' report and probably exaggerated by the relatively thin trading volume.
"This week has been fairly volatile in the sense that we haven't had a return to what we'd call normal liquidity conditions,'' said George Davis, chief technical analyst at RBC Capital Markets.
"There's still quite a few people in the market that are off on holidays and the lack of liquidity has sort of exacerbated the price move.''
The dollar has also taken a hit from an expected U.S. slowdown, which stirs fears that Canada could be shaken up by the rippling effects, Davis said.
JPMorgan said Friday it has substantially lowered its Canadian economic forecast for the first three months of 2008, saying it now expects what's sometimes called "negative growth'' -- declining economic activity -- instead of positive growth.
JPMorgan said it now is forecasting that Canadian gross domestic product will fall by 0.5 per cent in the first quarter, rather than increase by one per cent as previously estimated.
On the other hand, it also said the fourth quarter of 2007 appears to have done better than expected, with the revised GDP growth now forecast to be 1.8 per cent, up from one per cent.
The firm expects full-year GDP growth in Canada to be 1.6 per cent, down from an initial projection of 1.9 per cent. The estimate is off from the 2.6 per cent growth in 2007.
On Friday, the U.S. Labour Department released a non-farm payrolls report which showed that a mere 18,000 jobs were created in December -- an extreme drop from the 115,000 created in November and far less than the widespread predictions of 70,000 jobs.
Global equity markets are also weighing on the back of the loonie.
"When equity markets come under selling pressure, people are more pessimistic on the global growth outlook,'' Davis said.
"What we've tended to see is that, as that's taken place, the Canadian dollar has weakened off.''
The volatile price of oil set a new record above US$100 earlier this week but moved down on Friday. The light, sweet crude for February delivery fell $1.57 to US$97.61 a barrel on the New York Mercantile Exchange.
Gold also lost some ground as the February bullion contract moved down $8.70 at to US$860.40 an ounce.
In response, investors are reweighting their opinion of the loonie.
"In the short term, based on market sentiment, the risk is that we see the Canadian dollar weaken off a little bit further,'' Davis said.
Bolstering that view was a report Friday from the University of Western Ontario's business school. The Ivey Purchasing Managers index fell to 45.9 in December from 58.7 in November, indicating activity contracted from one month to the next.
"The Ivey number was enough of a concern to cause the market to get a little more fretful of the near term outlook for the Canadian dollar,'' said David Watt, a senior currency analyst at RBC Capital Markets.
He also said that investors are looking beyond the current outlook by the U.S. Federal Reserve to consider what their next phase of behaviour might involve, such as hiking interest rates sooner than anticipated.
"Expectations are that the Bank of Canada will likely lower interest rates as well but more modestly than in the U.S. because of the relative outperformance of our economy,'' said Adrienne Warren, a senior economist at Scotiabank.
"Essentially there's a divergence with U.S. interest rates falling more rapidly than those in Canada.''
