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Oct 27, 2017

Canadian dollar recovers from 3-month low as oil rises

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The Canadian dollar edged higher against its U.S. counterpart on Friday, recovering from an earlier three-month low, as oil rose and the market weighed prospects of Federal Reserve Governor Jerome Powell being picked to head the U.S. central bank.

U.S. crude oil futures jumped to the highest since early March, settling 2.4 per cent higher at US$53.90 a barrel, as the world's top producers indicated support for extending a deal to rein in output. 

The U.S. dollar pared some of its earlier gains versus a basket of currencies following a report that President Donald Trump is leaning toward Powell as his pick for Fed Chair. Powell is seen as less hawkish than one of the other leading candidates.

Still, the Canadian dollar has been the weakest performer of the G10 currencies in the seven weeks since the Bank of Canada last raised interest rates, and some strategists predict more declines in value after the central bank on Wednesday dialed back expectations for more rate increases this year. 

"We do think that the loonie will remain on the defensive, at least for now," said Bipan Rai, senior macro strategist at CIBC Capital Markets. "Positioning and sentiment still remain overly bullish on the Canadian dollar."

Bullish bets on the loonie held near their highest in about five years, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed.

As of Oct. 24, Canadian dollar net long positions had dipped to 72,332 contracts from 75,086 a week earlier. At 4 p.m. ET, the Canadian dollar was trading at $1.2827 to the greenback, or 77.96 cents US, up 0.1 per cent.

It touched its weakest intraday since July 12, when the Bank of Canada raised rates for the first time in nearly seven years, at $1.2916. For the week, it declined 1.6 per cent.

Canadian government bond prices were higher across a flatter yield curve, with the two-year up 6 cents to yield 1.427 per cent and the 10-year rising 37 cents to yield 1.989 per cent. The gap between Canada's two-year yield and its U.S. counterpart widened by 0.7 of a basis point to a spread of -16.9 basis points, its widest since July 11.