Canadian dollar pulls back as bullish sentiment ebbs ahead of rate decisions

TORONTO (Reuters) - The Canadian dollar weakened against the greenback on Tuesday, retreating from an earlier three-month high as positive investor sentiment was tempered ahead of interest rate decisions by the Bank of Canada and the Federal Reserve.

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

The S&P 500 eased back from a record high after a U.S. administration official told Reuters that Washington and Beijing were continuing to work on an interim trade agreement but that it may not be completed in time for the leaders of the two countries to sign in Chile next month.

“We have seen a little bit of client sentiment that maybe risk assets have gone too far, you’re going to see a little bit of a retracement,” said Scott Lampard, head of global markets at HSBC Bank Canada. “It feels like it is more trading activity as opposed to anything more structural right now.”

The loonie has rallied about 2% since early October, buoyed by robust domestic jobs data and investor optimism that a U.S.-China trade deal could boost Canada’s commodity-linked economy.

“Those that have had a bullish Canadian dollar view and position have gotten some satisfaction the last number of weeks as the data in Canada has held up well,” Lampard said.

The Bank of Canada is likely to keep interest rates steady at 1.75% on Wednesday in its first policy announcement since last week’s federal election, despite signs that investors seeking higher-yielding currencies are shifting more money into Canadian dollars.

The Fed is also due to make an interest rate announcement on Wednesday. It is expected to lower the range for its policy rate to below the Bank of Canada's equivalent rate for the first time since December 2016. FEDWATCHBOCWATCH

At 3:40 p.m. (1940 GMT), the Canadian dollar CAD=D4 was trading 0.3% lower at 1.3094 to the greenback, or 76.37 U.S. cents. The currency's weakest level of the session was 1.3096, while it touched its strongest level since July 22 at 1.3043.

The decline for the loonie came as the price of oil, one of Canada's major exports, lost ground for a second day. U.S. crude oil futures CLc1 settled 0.5% lower at $55.54 a barrel.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 2 Canadian cents to yield 1.7% and the 10-year CA10YT=RR rising 22 Canadian cents to yield 1.595%.

On Monday, the 10-year yield touched its highest intraday level since July 16 at 1.628%.

Reporting by Fergal Smith; Editing by Alistair Bell and Peter Cooney