TORONTO/OTTAWA: The Canadian dollar strengthened modestly against the greenback on Tuesday as oil prices rose, but the loonie stuck to a tight range as investors looked ahead to a rate decision from the Federal Reserve.
Weaker-than-expected US data also weighed on the US currency, to the benefit of the Canadian dollar. Investors were betting that the Fed will strike a dovish tone in its policy statement to be released on Wednesday, but the uncertainty around the announcement kept moves in the Canadian dollar muted.
"It's tough to figure out what exactly their reaction function is right now. They were more dovish than we thought at the prior meeting," said Benjamin Reitzes, senior economist at BMO Capital Markets.
The Canadian dollar saw little reaction to comments from Bank of Canada Governor Stephen Poloz that it would take another significant economic shock for the central bank to consider cutting rates again.
Reitzes said that had been built in to market expectations after the bank earlier this month upgraded its economic forecasts and brought forward when it expects the output gap to close.
"That really wouldn't be consistent with a continued easing bias," said Reitzes.
The implied probability of a Bank of Canada rate hike this year has increased to 24 percent from near zero before stronger-than-expected retail sales data on Friday, overnight index swaps (OIS) showed. At the start of March, the OIS market had implied a more than 50 percent chance of a cut.
In midday trading, the Canadian dollar was at C$1.2628 to the greenback, or 79.19 US cents, stronger than Monday's close of C$1.2686, or 78.83 US cents.
The loonie has rallied 16 percent since falling to a 12-year low in January.
Oil prices rose, boosted by a weaker dollar and by expectations that demand could grow quickly enough to match supply this year. US crude prices were up $1.33 at $43.97 a barrel.
Canadian government bond prices were lower across the maturity curve, with the two-year price down half a Canadian cent to yield 0.702 percent and the new benchmark 10-year falling 26 Canadian cents to yield 1.573 percent.
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