Canadian dollar dips as higher bond yields dominate FX market

TORONTO: The Canadian dollar edged lower against its US counterpart on Thursday, pulling back from an earlier one-week high as a sell-off on Wall Street driven by higher bond yields offset surging oil prices.

The safe-haven US dollar rallied against a basket of major currencies and Wall Street slumped after remarks from Federal Reserve Chair Jerome Powell disappointed investors worried about rising longer-term US bond yields.

Canada runs a current account deficit and is a major producer of commodities, including oil, so the loonie tends to be sensitive to risk appetite. US crude oil futures settled 4.2% higher at $63.83 a barrel after OPEC and its allies agreed to keep production unchanged into April.

"Canadian dollar traders' heads were spinning today in attempting to digest OPEC and Powell at the same time," said Adam Button, chief currency analyst at ForexLive.

"The market has become preoccupied with higher yields and until there is a sense of a ceiling, that's going to be the main driver of all markets, including FX."

The Canadian dollar was trading 0.1% lower at 1.2661 to the greenback, or 78.98 US cents, having touched its strongest intraday level since last Thursday at 1.2575. Last Thursday, it touched a three-year high at 1.2464.

Canadian dollar forecasts for the coming months have been raised by strategists, reflecting recent gains for the currency but also expectations that commodity prices will benefit from the reopening of the global economy, a Reuters poll showed.

Canadian labor productivity fell 2.0% in the fourth quarter, Statistics Canada said. Canada's international trade data for January is due on Friday.