TORONTO: The Canadian dollar weakened on Tuesday against its US counterpart as prices of oil, one of Canada's major exports, fell and the greenback climbed broadly ahead of a widely expected interest rate hike by the US Federal Reserve.
Oil tumbled to a three-month low after OPEC reported a rise in global crude stocks and a surprise output jump from its biggest member, Saudi Arabia, further pressuring prices that have almost completely erased gains since the producer cartel announced planned production cuts in November.
Meanwhile, with US inflation showing signs of quickening, Fed policymakers may signal on Wednesday there could be more than the three rate rises they forecast for this year.
By comparison, the Bank of Canada has maintained a cautious tone, leading to a widening spread between the yields of the two countries' bonds.
"Oil had been this pillar of support that had been offsetting the drag from spreads," said Eric Theoret, a currency strategist at Scotiabank. "The decline in oil is removing some of that support."
Canadian government bond prices were slightly higher across a flatter yield curve, with the two-year
up 4 Canadian cents to yield 0.854 percent and the 10-year rising 34 Canadian cents to yield 1.835 percent.
The two-year yield fell 2.9 basis points further below its US Treasury equivalent to a spread of -52.6 basis points. Earlier in March, it had touched its widest gap since January 2016 at -55.2 basis points.
The Canadian dollar settled at C$1.3485 to the greenback, or 74.16 US cents, weaker than Monday's close of C$1.3444, or 74.38 US cents.
The currency's strongest level of the session was C$1.3440, while its weakest was C$1.3496.
Last week the loonie hit a two-month low at C$1.3535 as oil dropped below $50 a barrel and as the yield advantage for the US dollar grew.
Gains for the US dollar against a basket of currencies also came as European currencies were weighed down by perceived political risks from Dutch and French elections as well as Britain's planned exit from the EU.
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