Loonie falls as rising bond yields boost greenback

The Canadian dollar slipped against its U.S. counterpart on Friday, as higher bond yields in the United States boosted the appeal of the greenback, while domestic data showed a smaller-than-expected increase in wholesale trade.

U.S. bond yields surge on inflation expectations

The U.S. dollar rose against a basket of major currencies, as U.S. Treasury yields jumped to their highest levels in more than a year, driven by expectations of higher inflation and economic growth. The yield on the 10-year U.S. Treasury note rose to 3.695%, the highest since January 2023.

The rise in U.S. bond yields was fueled by strong U.S. economic data, such as the producer price index, which rose more than expected in January, and the consumer sentiment index, which improved in February. The data reinforced the view that the U.S. economy is recovering faster than expected from the pandemic, and that the Federal Reserve may have to tighten its monetary policy sooner than anticipated.


The higher U.S. bond yields also reflected the optimism about the U.S. fiscal stimulus, as the House of Representatives approved a $1.9 trillion coronavirus relief package, which is expected to pass the Senate next week. The stimulus package is seen as a boost for the U.S. consumer spending, which accounts for about 70% of the U.S. gross domestic product.

Canadian wholesale trade rises less than forecast

The Canadian dollar weakened against the U.S. dollar, as Canadian economic data showed a weaker-than-expected performance in December. Canadian wholesale trade rose 0.3% in December from November, missing the 0.8% increase that analysts had forecast. The increase was the smallest since April 2023, and reflected lower sales in the machinery, equipment, and supplies subsector.

The Canadian wholesale trade data followed a disappointing retail sales report on Wednesday, which showed a 3.4% drop in December, the largest decline since April 2023. The data suggested that the Canadian consumer spending was hit by the second wave of COVID-19 infections and the lockdown measures imposed by some provinces.

The Canadian dollar was also pressured by the lower oil prices, as the global benchmark Brent crude oil fell 0.8% to $77.62 a barrel, amid concerns about the demand outlook and the supply glut. Oil is one of Canada’s major exports, and its price movements tend to affect the Canadian dollar.

Loonie trades in a narrow range

The loonie traded in a narrow range of 1.3462 to 1.3507 against the greenback, after touching its strongest level in two months on Thursday at 1.3410. The currency was on track to end the week with a 0.1% loss, snapping a six-week winning streak.

The loonie’s direction next week may depend on the Canadian consumer price index report for January, which is due on Tuesday, and the Canadian gross domestic product report for December, which is due on Friday. The inflation report is expected to show a slight easing to 3.3% from 3.4% in December, while the GDP report is expected to show a 0.1% contraction in December, following a 0.7% expansion in November.

The loonie may also be influenced by the global market sentiment, the U.S. economic data, and the developments in the U.S. fiscal stimulus. The loonie may benefit from the risk-on mood, the weaker U.S. dollar, and the higher oil prices, but may face headwinds from the stronger U.S. data, the higher U.S. bond yields, and the lower oil demand.

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