TORONTO, Sept 24: The Canadian dollar ended lower versus the US greenback on Friday as oil prices retreated, but it rose versus overseas currencies on optimism about domestic growth and interest rate increases.
Canadian bond prices were hit by the oil retreat and by renewed expectations that the Bank of Canada will raise interest rates next month.
The currency finished at C$1.1712 to the US dollar, or 85.38 US cents, down from C$1.1705 to the US dollar, or 85.43 US cents, at Thursday’s close.
It drove as high as C$1.1683, or 85.59 U.S. cents, earlier in the session, but then retraced its steps as Hurricane Rita was downgraded to a Category 3 storm, easing fears that U.S. oil production will be hit hard when the storm makes landfall on Saturday.
Energy prices really have come down for the day, even though they are up considerably over the past week, said Carolyn Kwan, financial markets economist at Scotia Capital.
The price of oil closed around $64 per barrel on Friday after going as high as $68 on Thursday. It has been a driving force behind the Canadian dollar’s 9 per cent surge since May.
But while the currency ended flat versus the greenback, it surged against overseas currencies such as the euro and the Australian dollar as traders concluded that strong North American economic growth and interest rate increases would not be short-circuited by high energy prices.
The recent strength of the loonie has prompted some to wonder if the Bank of Canada may decide not to proceed with an expected interest rate increase in October.
But in a speech on Thursday, central bank Governor David Dodge said the currency’s rise was due to a number of different factors and said the higher Canadian dollar will improve the terms of Canadian trade.
That really struck me, I think he’s feeling that the Canadian dollar appreciation is not going to be a single factor that will prevent tightening going forward, Kwan said.
The bank raised its overnight rate by one quarter of a per centage point earlier this month, its first increase in nearly a year.
The expectations of higher rates forced bond prices lower on Friday, but the market’s main driver was easing oil prices as Hurricane Rita worries dissipated, eroding the safe-haven appeal of government debt.
Losses were spread all across the curve, but they did not match the steeper fall of US Treasuries, meaning that US-Canada yield spreads widened slightly.
Traders will keep an eye on the meeting of Group of Seven finance ministers in Washington this weekend.
Next week, Canadian economic data covering producer prices and raw materials for August will be released, as will July gross domestic product.
The two-year bond slid 14 Canadian cents to C$98.96 to yield 3.251 per cent, while the 10-year bond fell 50 Canadian cents to C$104.65 to yield 3.917 per cent.
The yield spread between the two-year and 10-year bond moved to 66.6 basis points from 67.3 at the previous close.
The 30-year bond retreated 87 Canadian cents to C$113.85 to yield 4.204 per cent. In the United States, the 30-year treasury yielded 4.521 per cent.
The three-month when-issued T-bill yielded 2.87 per cent, up from 2.85 per cent at the previous close. —Reuters
