TORONTO: The Canadian dollar pulled back from recent strong gains for a second session on Friday as the market turned its attention to next week's Bank of Canada policy statement.
South of the border, data showed producer prices had their largest increase in nine months in March. That report helped the US dollar trim some declines, putting further pressure on the loonie.
Since hitting a 4-1/2 year low in mid-March, the Canadian dollar has climbed about 3 percent, but it has given back some gains over the last two days.
Some signs of strength in the domestic economy, as well as a weaker US dollar have boosted sentiment for the loonie, which came under intense selling pressure earlier in the year. Many analysts don't expect the gains to last.
"With the surprising strength in the loonie over the last week or so, we got to an area where, in the short term, the loonie is overvalued, in my opinion," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.
The Canadian dollar was at C$1.0966 to the greenback, or 91.19 US cents, weaker than Thursday's close of C$1.0929, or 91.50 US cents.
With no domestic economic data on tap on Friday, investors are turning their attention to the Bank of Canada's policy statement next Wednesday. A more dovish central bank tone has hit the loonie hard in the past few months and markets will be watching to see if its stance changes.
The Bank of Canada statement poses a risk for the loonie as the more positive sentiment over the currency recently could set some investors up for disappointment if the central bank maintains its dovish tone, Smith said.
"I think with the rally that we've seen over the last couple weeks, we could see that fade more and I don't think it's a far stretch to say we could be back at C$1.10 to C$1.11."
Canadian government bond prices were higher across the maturity curve, with the two-year up 2-1/2 Canadian cents to yield 1.042 percent and the benchmark 10-year up 37 Canadian cents to yield 2.401 percent.
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