The Canadian dollar weakened to a two-month low against its U.S. counterpart on Tuesday, as safe-haven demand for the greenback offset the potential boost to Canada’s economy from higher oil prices.
The loonie was trading 0.4% lower at 1.3784 per U.S. dollar, or 72.55 U.S. cents, marking its weakest level since January 23.
“Price swings are mitigated by large offsetting forces – haven-buying benefiting the USD, and rising oil prices benefiting CAD,” said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.
“For now, geopolitical risk is dominating, and the concern is that for each additional day that the Strait of Hormuz remains closed, oil markets will need added time to normalize and make up for this disruption.” The Strait of Hormuz usually carries about a fifth of global energy supplies. Gulf nations have seen exports blocked in the strait since the war in Iran began on February 28. The U.S. dollar rose against a basket of major currencies as investors doubted the Middle East conflict would end quickly, while the price of oil, one of Canada’s major exports, was trading 5.2% higher at $92.75 a barrel.
Earlier this month, oil spiked to a four-year high at $119.48.
“Unless we see another run-up in oil prices, we suspect that USD-CAD gets a natural upwards drift from risk-off on the USD leg,” Ying said.
“Near term, we don’t think 1.40 is out of the question, especially if tensions continue to escalate.” Canadian data was upbeat, with a preliminary estimate showing that factory sales rose 3.8% in February from January, largely driven by higher sales in the transportation equipment and food sub-sectors.
Canadian bond yields moved higher across a steeper curve. The 10-year was up 5.8 basis points at 3.602%, moving closer to the nearly two-year high it touched during Monday’s session at 3.643%.