May 31, 2019 / 9:00 PM / 4 months ago

CANADA FX DEBT-C$ hits 5-month low as tariffs on Mexico raise trade deal doubts

 (Adds strategist quotes and details throughout, updates prices)
    * Loonie falls for fourth straight month
    * Canadian GDP grows by 0.4% annualized in the first quarter
    * Price of U.S. oil decreases 5.5%
    * Canada's 10-year yield hits a near two-year low

    By Fergal Smith
    TORONTO, May 31 (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.
    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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