C$ hits 1-week low; caution ahead of central bank

TORONTO: The Canadian dollar weakened to its lowest level in over a week against the greenback on Monday, despite encouraging economic data out of China as investors were cautious ahead of a Bank of Canada policy decision later in the week.

China's factory activity expanded at the fastest pace in five months in May as new orders rose. The loonie is often sensitive to developments in China, which is the world's second-largest economy and a major consumer of natural resources.

But the Canadian dollar entered the day on weak footing, extending Friday's decline that was prompted by disappointing domestic economic growth in the first quarter.

Firmer yields for US Treasuries following last week's rout also gave the US dollar a lift to the detriment of the loonie, said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.

Focus was on the Bank of Canada's monetary policy statement on Wednesday. The central bank has taken a neutral stance since late last year and has flagged its concerns about the weak inflation environment, but investors are watching to see if the bank will alter its tone after the recent pick up in inflation.

"There won't be a huge amount of large positions being taken heading into the Bank of Canada. That being said, I don't think we'll see a material deviation from what we've heard previously from Governor Poloz," said Smith.

"I think that he'll try to stay away from any language that materially strengthens the Canadian dollar because he knows how important a weak Canadian dollar is to the export sector and the economy, and hence the overall recovery in Canada."

The Canadian dollar was at C$1.0897 to the greenback, or 91.77 US cents, not far from its session low of C$1.0905. The currency was weaker than Friday's close of C$1.0842, or 92.23 US cents.

Canadian government bond prices were lower across the maturity curve, with the two-year down 1-1/2 Canadian cents to yield 1.061 percent and the benchmark 10-year was down 31 Canadian cents to yield 2.283 percent.