The Canadian dollar slipped for a sixth straight trading day on Wednesday as the U.S. dollar rose across a broad set of currencies and the Bank of Canada’s meeting minutes conveyed a willingness to stay on the sidelines.
At the time of reporting the loonie was quoted at 1.3705 per U.S. dollar, equivalent to 72.97 U.S. cents, after trading between 1.3685 and 1.3718 during the session.
Minutes from the BoC’s latest decision showed the Governing Council felt it could afford to be patient and keep its policy rate at 2.25% in the run-up to its April 29 announcement, while noting that conditions could change rapidly. In a market note, Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, summarized the minutes: "The Bank of Canada is comfortable standing pat for now amid heightened uncertainty on both sides of the outlook."
Reitzes added that policymakers will likely want to see multiple inflation prints before concluding that price pressures are broadening, and that the recent uptick in the unemployment rate argues against further near-term tightening: "We’ll likely need to see a few inflation reports for policymakers to be convinced that price pressures are broadening ... while the rise in the unemployment rate suggests the last thing the economy needs is higher policy rates."
Labour market data released on Friday showed Canada lost 17,700 jobs in April and the unemployment rate climbed to 6.9%, a six-month high. That weakness in employment has been apparent amid trade uncertainty, according to the data.
Despite that softness in the job market, investors continue to price in two interest-rate increases from the BoC by December, a view supported in part by recent strength in oil, one of Canada’s key exports. Oil settled 1.1% lower at $101.02 a barrel on the day, trimming some of the gains it had made recently, but the prior rise has helped lift expectations for near-term inflation pressures.
Market moves extended beyond currencies. Canadian government bond yields edged lower across a flatter curve, with the 10-year note down 1.5 basis points at 3.577% after earlier touching an eight-day high of 3.610%.
The U.S. dollar’s broad advance was supported by a stronger-than-expected U.S. inflation reading, which underpinned demand for the greenback and contributed to the loonie’s decline.
Market implications
- Currency markets continued to favor the U.S. dollar as rate expectations and macro data diverged between the two countries.
- Movements in oil prices remain an important influence on the Canadian dollar given Canada’s status as a major oil exporter.
- Canadian government bond yields reacted to the mix of weaker domestic labour data and shifting inflation expectations.