August 2, 2017 / 8:46 PM / in 4 months

CANADA FX DEBT-C$ weakens to near 2-week low as yield spreads widen

 (Adds strategist comment, updates prices)
    * Canadian dollar at C$1.2572, or 79.54 U.S. cents
    * Loonie touches its weakest since July 21 at C$1.2593
    * Bond prices broadly higher across the yield curve

    By Alastair Sharp
    TORONTO, Aug 2 (Reuters) - The Canadian dollar weakened to a
nearly two-week low against its U.S. counterpart on Wednesday,
as the gap between U.S. and Canadian yields widened after having
narrowed sharply in recent months.
    Canada's two-year yield fell 2.1 basis points further below
its U.S. counterpart to a spread of -10.2 basis points,
suggesting investors are paring their bets on the relative pace
of future rate increases by the Bank of Canada versus the U.S.
Federal Reserve. 
    The spread last week hit its narrowest since May 2015 at
-2.4 basis points, after the Bank of Canada raised interest
rates earlier in July for the first time in nearly seven years. 
    The market is expecting one more increase this year, while
the outlook beyond that is less clear.
    "The market is perhaps looking at how far and how quickly
the Canadian dollar has come ... and perhaps concluding that the
bank may not be able to be too aggressive with interest rates
going forward," said Shaun Osborne, chief currency strategist at
Scotiabank.
    The loonie has rallied nearly 10 percent since early May. It
touched on Thursday its strongest in more than two years at
C$1.2414.    
    "We had two or three couple goes at pushing below C$1.24 and
couldn't make any progress below that point," Scotia's Osborne
said.
    The loonie's slip also came in the wake of a senior U.S.
official saying U.S. President Donald Trump is close to a
decision on how to respond to what he considers China's unfair
trade practices.             
    Commodity-linked currencies could be hurt by the threat of
protectionist policies.
    At 4 p.m. ET (1305 GMT), the Canadian dollar          was
trading at C$1.2572 to the greenback, or 79.54 U.S. cents, down
0.3 percent.
    The currency's strongest level of the session was C$1.2533,
while it touched its weakest since July 21 at C$1.2593.
    Oil, one of Canada's major exports, edged higher on
Wednesday as surging U.S. fuel demand and strong refinery runs
offset data from the U.S. Energy Department that showed crude
inventories did not fall as much as expected last week.
            
    Canadian government bond prices were broadly higher across
the yield curve, with the two-year            up 10 Canadian
cents to yield 1.257 percent and the 10-year             rising
18 Canadian cents to yield 1.937 percent.
    Canadian and U.S. jobs data for July and domestic trade data
for June are due on Friday.         

 (Additioanl reporting by Fergal Smith; Editing by Meredith
Mazzilli and Steve Orlofsky)
  
 

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