Home Debt CANADA FX DEBT-Risk aversion weighs on C$ ahead of Fed rate decision

CANADA FX DEBT-Risk aversion weighs on C$ ahead of Fed rate decision

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Canadian dollar weakens 0.5% against the greenback


Touches its strongest since Nov. 16 at 1.3297


Price of U.S. oil settles 2.2% lower


10-year yield touches a near three-week high

(Adds strategist quotes and details throughout; updates prices)

By Fergal Smith

TORONTO, Jan 30 (Reuters) – The Canadian dollar weakened against its U.S. counterpart on Monday, pulling back from its strongest level in over two months, as investors turned cautious ahead of an expected interest rate hike this week by the Federal Reserve.

The loonie was trading 0.5% lower at 1.3380 to the greenback, or 74.74 U.S. cents, after earlier touching its strongest since Nov. 16 at 1.3297.

Wall Street shares fell and the price of oil, one of Canada’s major exports, settled 2.2% lower at $77.90 a barrel.

The Fed is expected to raise its key interest rate by 25 basis points at the end of its two-day policy meeting on Wednesday, followed by Fed Chair Jerome Powell’s speech, which will be scrutinized for any signs of further increases.

“Implied volatility is ratcheting up and risk-sensitive (currency) pairs are generally selling off as traders batten the hatches ahead of this week’s central bank meetings,” said Karl Schamotta, chief market strategist at Corpay.

“If Jerome Powell tries to fight a premature loosening in financial conditions by delivering a more hawkish message, the loonie could sell off quite sharply.”

The Bank of Canada has also been raising interest rates. Last Wednesday, the central bank lifted its benchmark rate to a 15-year high of 4.5% and signaled it would now pause to assess how effective tightening had been in dampening excess demand.

Canadian GDP data, due on Tuesday, is expected to show the economy expanded by 0.1% in November.

Speculators have raised their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission showed on Friday.

Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year touched its highest since Jan. 12 at 2.950% before dipping to 2.929%, up 4.3 basis points on the day. (Reporting by Fergal Smith Editing by Bernadette Baum, William Maclean)

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