TORONTO (Reuters) - The Canadian dollar retreated on Tuesday against its U.S. counterpart ahead of an expected interest rate hike by the Bank of Canada on Wednesday.
The central bank rate decision was the main focus for the Canadian dollar, which softened even as prices of oil, one of Canada’s major exports, rose and the U.S. dollar fell against a basket of major currencies. [O/R]
At 4:00 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2923 to the greenback, or 77.38 U.S. cents, down 0.2 percent.
The currency traded in a range of C$1.2886 to C$1.2944, still within reach of a 10-month high at C$1.2860, reached on Friday. The currency had rallied following stronger-than-expected domestic jobs data, which bolstered expectations of a rate increase on Wednesday.
“It’s lost a little bit of ground today, but we’re really positioning ourselves in front of the imminent rate hike tomorrow,” said Rahim Madhavji, President at KnightsbridgeFX.com, but he added that the Bank of Canada was “very far away” from going on a long-term rate hike cycle.
“I think it’s just a short term blip ... much of it is priced into the market, and I think we’ll oscillate around this level for the rest of the year.”
Madhavji said overall weakness in oil prices and uncertainty around the North American Free Trade Agreement will keep the loonie under some pressure this year. He said the Bank of Canada will likely take more action in 2018.
Chances of a hike on Wednesday sit just under 88 percent, according to data from the overnight index swaps market. A nearly 80-percent chance of a second hike has been implied by December. BOCWATCH
After years of being warned that borrowing costs would have to rise eventually, debt-laden Canadians may be about to face a reckoning if the Bank of Canada hikes rates.
Canadian government bond prices were higher across the yield curve. The two-year CA2YT=RR rose 6.5 Canadian cents to yield 1.124 percent and the 10-year CA10YT=RR climbed 29 Canadian cents to yield 1.860 percent.
The 2-year yield fell 3.1 basis further below its U.S. equivalent to a spread of -25.82 basis points. The spread had touched its narrowest on Tuesday since October at -22.7 basis points.
Canadian housing starts rose more than expected in June as construction intentions in and around Toronto remained strong while Vancouver trended downwards, data from the Canada Mortgage and Housing Corporation showed.
Reporting by Solarina Ho and Fergal Smith; Editing by Sandra Maler