May 31, 2019 / 1:40 PM / 3 months ago

Canadian dollar hits five-month low as tariffs on Mexico raise trade deal doubts

TORONTO (Reuters) - The Canadian dollar weakened to a five-month low against the greenback and lost ground against all the other G10 currencies on Friday, as potential U.S. tariffs on Mexico threatened to lessen the effectiveness of a new North American trade deal.

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

Canadian Foreign Minister Chrystia Freeland said that U.S. President Donald Trump’s threat to impose tariffs on Mexican imports in a migration dispute does not involve Canada, which will press ahead to ratify the new United States-Mexico-Canada Agreement (USMCA) trade deal in tandem with its allies.

But market players worried that the deal, which is intended to modernize free trade arrangements between the three countries, could be devalued.

“The direct impact of this additional tariff on Mexico is worrying because it undermines the USMCA deal,” said Amo Sahota, director at Klarity FX in San Francisco. “I think it’s fighting for its life at the moment, the loonie.”

The tariffs on Mexico stoked global trade tensions, pressuring stock markets. Canada runs a current account deficit and exports many commodities, including oil, so its economy could be hurt by a slowdown in the global flow of trade or capital.

The price of oil posted its biggest monthly drop in six months. U.S. crude oil futures settled 5.5% lower at $53.50 a barrel.

Meanwhile, data showed that the Canadian economy expanded at an annualized rate of just 0.4% in the first quarter. But signs of a strong recovery in March supported the Bank of Canada’s view that the slowdown was temporary.

At 4:07PM EST (2007 GMT), the Canadian dollar was trading 0.1% lower at 1.3515 to the greenback, or 73.99 U.S. cents. It was the only G10 currency to lose ground against the greenback.

The loonie, which touched its weakest intraday level since Jan. 3 at 1.3565, was down 0.9% in May, its fourth straight monthly decline.

Still, speculators have cut their bearish bets on the Canadian dollar for the second straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of May 28, net short positions had fallen to 39,423 contracts from 42,236 in the prior week.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year rose 18 Canadian cents to yield 1.427% and the 10-year climbed 63 Canadian cents to yield 1.486%.

The 10-year yield touched its lowest intraday since June 2017 at 1.478%.

Reporting by Fergal Smith; Editing by Susan Thomas and Diane Craft

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