Canadian dollar falls as U.S.-China tensions threaten global outlook

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday as rising tensions between the United States and China weighed on investor sentiment, with the loonie paring some of this week’s advance.

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

Wall Street’s main indexes eased from more than two-month highs hit in the previous session as President Donald Trump said the United States would react strongly if China imposes national security laws for Hong Kong in response to last year’s often violent pro-democracy protests.

“There are increasing threats to global growth in the deteriorating U.S.-China dialogue,” said Adam Button, chief currency analyst at ForexLive.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so the loonie tends to be sensitive to the global economic outlook. Investors also worried about the pace of a recovery from a coronavirus-fueled economic slump.

Bank of Canada Governor Stephen Poloz said the world was in an era where interest rates were probably going to stay low and would not go back to where they were 20 or 30 years ago.

On Tuesday, the chief executive officer of Canada Mortgage and Housing Corporation said that the national housing agency is forecasting a decline in average house prices of as much as 18% in the coming 12 months.

“The dire forecast from the CMHC is causing some soul searching in the Canadian dollar,” Button said.

The loonie was trading 0.3% lower at 1.3944 to the greenback, or 71.72 U.S. cents. The currency, which was up 1% since the start of the week, traded in a range of 1.3891 to 1.3970.

The decline for the loonie coincided with payroll services provider ADP reporting that Canada shed 226,700 nonfarm payroll jobs in April, when efforts to contain the coronavirus outbreak shut down much of the economy.

Canada’s retail sales report for March is due on Friday.

The price of oil, one of Canada’s major exports, rose to its highest since March, supported by lower U.S. crude inventories, OPEC-led supply cuts and recovering demand. U.S. crude oil futures settled 1.3% higher at $33.92 a barrel.

Canadian government bond yields were mixed across a flatter yield curve, with the 2-year rising 2.6 basis points to 0.333%.

Reporting by Fergal Smith; editing by Jonathan Oatis and Grant McCool