Canadian dollar retreats from six-week high ahead of BoC rate decision

TORONTO (Reuters) - The Canadian dollar pulled back from a six-week high against its broadly firmer U.S. counterpart on Tuesday, as investors weighed a rebound in the country’s exports before turning attention to a Bank of Canada interest rate decision on Wednesday.

FILE PHOTO: A Canada Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo GLOBAL BUSINESS WEEK AHEAD SEARCH GLOBAL BUSINESS 18 SEP FOR ALL IMAGES - RC1D295BC760

At 4 p.m. ET (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2698 to the greenback, or 78.75 U.S. cents, down 0.2 percent. It touched its strongest intraday since Oct. 24 at C$1.2624.

“We are moving into event risk such as the Bank of Canada interest rate decision tomorrow,” said Jeff Scott, senior currency strategist at OFX. “Maybe people don’t want to be holding onto (Canadian) dollars.”

Canada’s trade deficit narrowed to C$1.47 billion in October from a revised C$3.36 billion in September as exports increased after four consecutive monthly declines. Economists had forecast a deficit of C$2.70 billion.

“This report, combined with last week’s stellar employment report, will be looked favorably upon by the data dependent Bank of Canada,” said Dina Ignjatovic, an economist at TD Bank in a research note.

Economists expect the Bank of Canada to leave its benchmark interest rate on hold at 1 percent on Wednesday due to a number of uncertainties that could affect the domestic economy, including renegotiation of the North American Free Trade Agreement.

The central bank raised rates in July and September for the first time in seven years.

The loonie dipped despite a rise in the price of oil, one of Canada’s major exports.

U.S. crude CLc1 futures settled 0.3 percent higher at $57.62 a barrel, supported by strong demand, expectations of a drop in U.S. crude inventories and an OPEC-led deal to extend oil output cuts.

The U.S. dollar .DXY rose against a basket of major currencies for a second straight session, benefiting from optimism surrounding U.S. tax reform.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 2 Canadian cents to yield 1.539 percent and the 10-year CA10YT=RR rising 22 Canadian cents to yield 1.898 percent.

The gap between the 2 and 10-year yields narrowed by 1.5 basis points to a spread of 35.9 basis points, its narrowest since January 2008, tracking a flatter U.S. yield curve.

Reporting by Fergal Smith; Editing by David Gregorio and Diane Craft