The Canadian dollar edged lower against its U.S. counterpart on Tuesday as a drop in oil prices offset optimism that a deal to raise the U.S. debt ceiling would be passed by Congress.
The loonie was trading 0.1% lower at 1.36 to the greenback, or 73.53 U.S. cents, after moving in a range of 1.3568 to 1.3613.
“Under the hood, in terms of the fundamentals, you have got yield spreads giving it support and then weaker oil prices moving against it,” said Eric Theoret, a global macro strategist at Manulife Investment Management, mentioned by Reuters.
The price of oil, one of Canada’s major exports, settled 4.4% lower at $69.46 a barrel as mixed messages from major producers clouded the supply outlook ahead of the OPEC+ meeting this weekend.
U.S. bond yields fell as worries receded that the United States would default on its debt, while the gap between the Canadian 2-year yield and its U.S. equivalent narrowed by 5.6 basis points to about 20 basis points in favor of the U.S. bond.
The move in yield spreads came as investors awaited Canadian first-quarter GDP data on Tuesday, which could offer clues on the Bank of Canada policy outlook. Money markets see a roughly 30% chance the central bank would hike next week for the first time since January.
“The market is still very much focused on the Bank of Canada and what they’re going to do next,” said Theoret. “The GDP data is going to be important, but it’s not going to be the only thing that they’re looking at.”
The Canadian economy grew at an annualized rate of 6.3% in the fourth quarter of 2022, but growth is expected to slow in the first quarter as the economy adjusts to the end of the COVID-19 pandemic.
The Bank of Canada has said it expects to raise interest rates four times this year, starting in July. The central bank is trying to cool inflation, which is running at a 30-year high.
“The Bank of Canada is going to have to be very careful about how they hike rates,” said Theoret. “They don’t want to overdo it and risk a recession.”
The Canadian dollar is expected to remain range-bound in the near term, potentially moving lower if oil prices continue to fall.
