Canadian dollar holds near 14-month highs as rally stalls, Fed in focus

TORONTO (Reuters) - The Canadian dollar was steady against the greenback on Tuesday after briefly touching a 14-month high, as the U.S. currency pared earlier losses ahead of the Federal Reserve’s next policy announcement.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

The Canadian dollar, which has gained some 10 percent since early May, failed to crack C$1.2480 against the U.S. dollar, or 80.13 U.S. cents, after breaching C$1.25 on Monday, even as oil prices rallied 3 percent.

“I think we stalled out here a little bit. We’ve had three good go’s at breaking the C$1.2480 level,” said Shaun Osborne, chief currency strategist at Scotiabank, who maintaining a C$1.28 year-end forecast.

“After a 10 percent rally in the CAD, it’s probably getting close to the end of the road.”

Osborne noted that the U.S. dollar tended to rally during the second half of the year, and that the Canadian dollar also appeared to be “completely disconnected” from the price of crude oil, a key Canadian export.

At 4 p.m. (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2505, or 79.97 U.S. cents, little changed from Monday's close.

The currency’s strongest level of the session was CC$1.2481, while its weakest level was C$1.2533.

The next key level to watch is C$1.2461, or 80.25 U.S. cents, reached in May 2016.

The U.S. dollar, which earlier touched a 13-month low against a basket of major currencies, has fallen nearly 4 percent over the past month and more than 8 percent this year.

The Fed began its meeting on Tuesday, but the market was not expecting a change in interest rates. Investors remained wary of the short-term U.S. economic outlook amid uncertainty surrounding the U.S. healthcare vote and an investigation into allegations of Russian meddling in the 2016 U.S. election. [FRX/]

In Canada, markets have fully priced in the expectation that the Bank of Canada will raise interest rates one more time by the end of the year. BOCWATCH

The spread between yields of Canadian and U.S. 2-year bonds has narrowed sharply since early June and was at 6.8 basis points, its narrowest since October 2015.

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR down 8.5 Canadian cents to yield 1.322 percent and the benchmark 10-year CA10YT=RR down 80 Canadian cents to yield 2.018 percent.

The two-year bond yield was at its highest in more than five years, while the 10-year bond yield was at its highest since Nov. 2014.

Reporting by Solarina Ho; Editing by Peter Cooney