Loonie firms as investors shun weaker economies on spreading virus

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Tuesday, clawing back some of the prior day’s decline as investors bet that Canada’s economy would hold up better than some others as the coronavirus spreads.

FILE PHOTO: Canadian loonies, one dollar coins, are displayed in this posed photograph in Toronto, October 10, 2008. REUTERS/Mark Blinch/File Photo

At 3:14 p.m. (2014 GMT), the Canadian dollar CAD=D4 was trading 0.1% stronger at 1.3275 to the greenback, or 75.33 U.S. cents. The currency, which on Monday hit a near two-week low at 1.3308, traded in a range of 1.3267 to 1.3306.

“Given the fact that commodities are getting crushed, particularly oil, and the economic outlook is certainly being put into question, the fact that the Canadian dollar has remained firmly within a 1.32 to 1.3330 range is pretty remarkable,” said Michael Goshko, corporate risk manager at Western Union Business Solutions.

Earlier this month, the commodity-linked loonie touched its weakest level since October at 1.3330.

“So far we are among the least dirty shirts in the laundry, because we have certainly seen weakness in Japan and in Europe,” Goshko said.

Economic growth in the euro zone was barely positive even before the coronavirus outbreak threatened to disrupt the global economy, data this month showed, while the U.S. dollar .DXY weakened on Tuesday as expectations grew that the Federal Reserve would cut interest rates this year to relieve pressure on the economy caused by the virus.

Canada’s fourth quarter GDP data is due on Friday which could help guide expectations for the Bank of Canada interest rate outlook. Last month opened the door to a cut should a recent slowdown in domestic growth persist.

Chances it would ease as soon as next week have climbed to nearly 30% from 10% last Wednesday. Bank of Canada Deputy Governor Tim Lane made no mention of future rate moves in a speech. BOCWATCH

The price of oil, one of Canada’s major exports, fell nearly 3% to $49.91 a barrel and U.S. stocks tumbled, with the selloff accelerating after the U.S. Centers for Disease Control and Prevention said Americans should begin to prepare for community spread of the new coronavirus.

Canadian government bond yields fell across the yield curve. The 5-year yield was down 1.8 basis points at 1.198%, having touched its lowest since Sept. 5 at 1.182%.

The gap between Canada’s 5-year yield and it U.S. equivalent moved 5.1 basis points to a spread of 4.9 basis points in favor of the Canadian bond, its highest since September 2017.

Reporting by Fergal Smith; Editing by Andrea Ricci and Chizu Nomiyama