The Canadian dollar edged lower against its U.S. counterpart on Wednesday as a sharp drop in the price of oil led to reduced bets the Bank of Canada would raise interest rates this year.
The price of oil, one of Canada’s major exports, fell to two-week lows as optimism grew about a possible end to the war in the Middle East, with reports the United States and Iran were nearing an initial peace deal. U.S. crude oil futures were trading 6.9% lower at US$95.24 a barrel.
“Lower energy prices may only affect CAD sentiment in as much as a sustained drop in oil prices would counter recent concerns about Bank of Canada policy tightening risks later this year in the event of a sustained rise in inflationary pressures,” Shaun Osborne and Eric Theoret, strategists at Scotiabank, said in a note.
The Bank of Canada has said that if oil prices stayed high and began pushing up inflation, it might have to respond with consecutive interest rate hikes. Investors have priced in about 45 basis points in tightening by December, down from 60 basis points earlier this week.
The loonie was trading 0.2% lower at 1.3640 per U.S. dollar, or 73.31 U.S. cents, after moving in a range of 1.3579 to 1.3641. All the other G10 currencies notched gains against the U.S. dollar, with the exception of the Norwegian crown. Norway is also a major oil producer.
In domestic data, the Ivey Purchasing Managers Index (PMI) rose on a seasonally adjusted basis to 57.7 last month from 49.7 in March, marking its highest level since September.
Canadian bond yields fell across the curve. The 10-year was down 9.9 basis points at 3.515%, extending its pullback from a near six-week high on Monday at 3.638%.