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Derivatives and currency traders see a growing chance that the Bank of Canada will drop interest rates back to a record low this year as the economic outlook dims abroad and at home.

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The loonie is in the midst of its longest, deepest downturn, and with oil prices dropping, there’s no relief in sight, prompting a lot of soul-searching about just what kind of economy Canada has built.





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The Canadian dollar fell to a 12-year low Wednesday and traders started pricing in a 50 per cent chance of a rate cut by May, up from the 31 per cent probability seen on Dec. 31, amid signs of economic weakness in China and declines in the price of oil, among Canada’s largest exports.

The Bank of Canada is counting on export growth and stability in crude prices to revive the economy after what may have been the slowest annual expansion since 2009. Yet speculation is brewing that policy makers will drop their target rate a quarter-point to 0.25 per cent, where it bottomed in 2009-2010. Private data this week showing Chinese manufacturing contracted the past 10 months renewed questions about global demand for crude, which is almost 30 per cent weaker than a year ago.