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Canada's Central Bank Sparks Concern

On January 21, the Canadian dollar (NYSEARCA:CAD) hit a four-year low against the U.S. dollar (NYSEARCA:USD) amid concerns over the Bank of Canada and the U.S. Federal Reserve. The CAD broke through the C$1.10 mark, which has long been considered a psychological barrier that can have a drastic effect on future forex trading. However, the CAD did gain slightly before the close of the day in the North American market.

The fall of the CAD was said to originate the night before when the USD unexpected rose after news broke of possible cutbacks in the Federal Reserve's program designed to stimulate the U.S. economy and domestic investing. No official announcement was ever made, but the article published in the Wall Street Journal stated that the Fed may drop its bond purchases to $65 billion per month from its current monthly purchases of $75 billion.

The reason why the CAD dropped from the news concerning the Fed is that investors are expected to start purchasing U.S. currency instead of Canadian. However, concerns about the Bank of Canada have been in play for some time and may come to a head in only a few days.

Late last year, the Bank of Canada dropped discussions about rate hikes after it had been suggesting they were on the horizon for nearly 18 months. This event immediately caused the CAD to waver on the market, which has appreciated the USD against the pair by more than 6 percent. A full 3 percent of this increase came in January 2014.

The executive director of foreign exchange sales at CIBC World Markets in Toronto, Don Mikolich, has agreed that CAD trading is at a downturn, stating, "The sentiment does continue to be quite firmly against Canada." Mikolich continued by discussing the fact that the Bank of Canada is comfortable in the weakening of the currency. "It's hard to say what levels they have in mind, ultimately, but I don't think we're there yet," Mikolich said.

At the close of the trading day on January 21, the CAD was at C$1.0972 against the USD. The last time the currency pair had been this low was in September 2009 when the CAD fell to C$1.1019 against the USD.

The Bank of Canada is due to release two important updates later in the week that may also affect the CAD: its annual Monetary Policy Report and a decision on interest rates. However, interest rates are expected to stay fixed at 1 percent.