Canadian dollar falls ahead of Bank of Canada rate decision as trade optimism ebbs

TORONTO (Reuters) - The Canadian dollar weakened against the greenback on Tuesday, paring some of its gains from the prior day as investors awaited a Bank of Canada interest rate decision and grew skeptical of the chances of a breakthrough in U.S.-China trade talks.

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

News of a 90-day truce in the trade war between the United States and China helped boost the loonie on Monday, as investors grew more optimistic on the outlook for the global economy.

But stocks fell on Tuesday as optimism faded over a speedy resolution to the trade conflict and a flattening U.S. Treasury yield curve set off warning lights about slowing growth.

The Bank of Canada has worried that the U.S.-China trade dispute is weighing on global growth and commodity prices.

Money markets and a strong majority of economists polled by Reuters expect the central bank to leave its benchmark interest rate unchanged at 1.75 percent on Wednesday, after it hiked the rate in October for the fifth time since July 2017.

Investors are reluctant to make bets on the loonie ahead of the interest rate decision and a meeting on Thursday of the Organization of the Petroleum Exporting Countries, said Simon Harvey, a currency market analyst for Monex Europe and Monex Canada.

The price of oil, one of Canada’s major exports, pared gains in volatile trading as fears flared that demand would stall due to the U.S.-China trade war, and that Russia remained a stumbling block to a deal to cut global crude supply.

U.S. crude oil futures CLc1 settled 0.6 percent higher at $53.25 a barrel.

At 3:34 p.m. (2034 GMT), the Canadian dollar CAD=D4 was trading 0.4 percent lower at 1.3247 to the greenback, or 75.49 U.S. cents.

The currency, which on Monday touched its strongest in nearly two weeks at 1.3160, traded in a range of 1.3164 to 1.3258.

Canadian labor productivity grew by 0.3 percent in the third quarter, reflecting a slowdown in business output from the previous quarter, while hours worked edged up, Statistics Canada said.

Canada’s trade report for October is due on Thursday and the November employment report is due on Friday.

Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The 10-year CA10YT=RR climbed 42 Canadian cents to yield 2.186 percent.

The 10-year yield touched its lowest intraday since July 20 at 2.168 percent.

Reporting by Fergal Smith; editing by Bernadette Baum and Jonathan Oatis