May 22, 2020 / 1:30 PM / 3 months ago

Canadian dollar pares weekly gain as U.S.-China tensions strain risk appetite

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, January 23, 2015. REUTERS/Mark Blinch

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday as rising U.S.-China tensions weighed on investor sentiment and domestic data showed a record decline in retail sales, with the loonie giving back some of the week’s rally.

Global equity markets edged lower as Beijing moved to impose a new security law on Hong Kong after last year’s pro-democracy unrest, further straining U.S.-China ties that cast a pall over economic recovery prospects.

Canada runs a current account deficit and is a major producer of commodities, including oil, so the loonie tends to be sensitive to the global flow of trade and capital.

“Risk sentiment – expressed via equity gains or losses – remains the key driving force behind the CAD,” strategists at Scotiabank, including Shaun Osborne, said in a note.

“While the CAD is trading closely with equity market sentiment, the rebound in crude oil prices and improvement in relative terms of trade warrant attention,” the strategists said.

Oil has rallied in recent days as economic activity starts to resume, but prices dropped after China said on Friday it would not publish an annual growth target for the first time. U.S. crude oil futures settled down nearly 2% at $33.25 a barrel.

The Canadian dollar was trading 0.3% lower at 1.3993 to the greenback, or 71.46 U.S. cents. The currency, which was up 0.7% for the week, traded in a range of 1.3945 to 1.4049.

Canadian retail sales plunged a record 10% in March as officials shuttered many non-essential businesses to slow the spread of the coronavirus pandemic, while the advance results for April indicate a near 16% decline, Statistics Canada said.

Canadian government bond yields eased across a flatter curve, with the 10-year yield down 3.8 basis points at 0.510%.

Reporting by Fergal Smith; Editing by Steve Orlofsky and Tom Brown

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