Toronto (Rajeev Sharma): — The Canadian dollar edged lower against the US dollar on Tuesday as falling equity markets and a widening gap between Canadian and US bond yields pressured the commodity-linked currency.
The loonie was trading 0.1 per cent lower at 1.3890 to the US dollar, or 71.99 US cents, after moving within a range of 1.3857 to 1.3898 during the session.
Market participants pointed to a risk-off mood in global markets as a key factor behind the weakness. “Stocks have given it up and it feels to me like this is a bit of Iran fears picking up,” said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull. “That’s why stocks are at their lows along with the loonie.”
US stock indexes declined despite expectations of easing inflation that have kept hopes alive for Federal Reserve interest rate cuts later this year. At the same time, the safe-haven US dollar strengthened against a basket of major currencies.
Geopolitical concerns also weighed on sentiment after US President Donald Trump urged Iranians to continue protests and said assistance was forthcoming, without providing details, as Iran’s leadership intensified its crackdown on widespread demonstrations.
Oil prices, however, rose on fears of potential supply disruptions. US crude futures climbed around 3 per cent to $61.26 a barrel. Iran, like Canada, is a major oil producer, and higher crude prices can sometimes support the Canadian dollar.
Still, analysts said interest rate differentials remained a key drag. “Zooming out, you can make the argument that yield spreads are in play again, especially since Friday’s Canadian jobs report,” Bregar said.
Data released on Friday showed Canadian job growth slowing sharply, while the unemployment rate rose to 6.8 per cent. Following the report, the yield on Canada’s two-year government bond eased by about half a basis point to 2.560 per cent.
The yield gap between Canadian and US two-year bonds widened to around 96 basis points, compared with about 87 basis points earlier this month, further undermining demand for the Canadian currency.
