Slowdown concerns take toll on Australian and Canadian dollar

Australia's dollar fell to a two-month low on Wednesday as signs of an economic slowdown supported bets on an interest rate cut later this year, while the Canadian dollar dropped again before the central bank's policy decision. Expectations for the Reserve Bank of Australia and the Bank of Canada to tilt towards a more dovish stance follow pauses by other central banks in policy tightening in 2019 in the face of waning economic momentum.

The Australian and Canadian dollars were the big movers in otherwise quiet FX markets, with the U.S. dollar holding near a two-week high after Tuesday's strong service industries and new home sales data. The euro paused before Thursday's European Central Bank meeting. The Aussie dollar slid 0.8 per cent to as low as $0.7024 after data showed economic growth was 0.2 per cent in the fourth quarter, below an expected 0.3 per cent. That left the Aussie at its lowest since Jan. 4.

Against the yen, the Aussie also fell, while the New Zealand dollar weakened as worries about the Australian economy spread. "The key domestic demand components were all weak and our economists suggest the door for rate cuts has opened further," said Adam Cole, currency strategist at RBC Capital Markets. The Canadian dollar extended its losses in European trade to touch C$1.3380, its lowest since Jan. 7, hurt by trade troubles, domestic political uncertainty and bets the Bank of Canada could be close to changing its policy direction.

The BoC holds its policy meeting on Wednesday, with a decision due at 1500 GMT. The dollar index rose marginally to 96.907 after hitting a two-week high of 97.008 on Tuesday. The euro slipped slightly to $1.1305, hovering near two-week lows versus the greenback as investors prepare for the possibility that the ECB will signal a delay in raising rates until 2020.

The ECB is also expected to re-launch long-term bank loans soon to revive the economy. Currency market volatility has slumped in 2019 as a pause in central bank tightening and hopes for a resolution in the U.S.-China trade conflict suppress price movements. Deutsche Bank's Currency Volatility Index is approaching record lows.

Viraj Patel, the global macro strategist at investment advisory firm Arkera, said realised volatility in euro/dollar was at or near record lows with traders struggling to find direction. "You have no real thematic direction. In these sort of FX markets, euro/dollar is looking for some sort of directional catalyst," he said.

Sterling fell towards one-week lows on profit taking and renewed worries about next week's parliamentary votes on Brexit. The Japanese yen stood little changed at 111.87 yen per dollar.

(With inputs from agencies.)