Canadian dollar posts limited gains as services economy shrinks

Canadian money. Dollar banknotes on wooden background

The Canadian dollar rose against its U.S. counterpart on Monday, but ‌the move was limited as investors weighed developments in the Middle East and data showed continued contraction in Canada’s services economy.

The loonie was trading 0.2 per cent higher at 1.3915 per U.S. dollar, or ​71.86 U.S. cents, after moving in a range of 1.3903 to 1.3947. Last ​Tuesday, the currency touched a near four-month low at 1.3966.

The U.S. ⁠and Iran weighed a framework plan to end their five‑week conflict, as Tehran said ​it wanted a lasting end to the war and pushed back against pressure to ​swiftly reopen the Strait of Hormuz under a temporary ceasefire.

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“The USD continues to trade at a significant premium relative to our fair value estimate - 1.3507 currently - which may result in a sharp ​fall in the spot rate once market volatility subsides,” Shaun Osborne and Eric ​Theoret, strategists at Scotiabank, said in a note.

“Until then, the risk premium on the USD will ‌remain ⁠elevated.”

Speculators have raised their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission showed on Friday. Non-commercial net-short positions stood at 32,684 contracts as of March 31, from 1,602 in the prior week.

Canada’s services economy contracted for ​a fifth straight month ​in March as ⁠geopolitical uncertainty contributed to a decline in new business and after higher fuel costs raised operating expenses, S&P Global’s Canada services PMI ​data showed.

The headline Business Activity Index rose to 47.2 last ​month from ⁠46.5 in February but remained below the 50 no-change mark. A reading below 50 shows deterioration in activity.

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The price of oil, one of Canada’s major exports, rose 2.2 per cent to $113.92 a ⁠barrel ​as investors remained wary about sustained supply losses ​due to shipping disruptions in the Strait of Hormuz.

Canadian bond yields were mixed across a flatter curve, with ​the 2-year up 2.7 basis points at 2.837 per cent.

Reporting by Fergal Smith Editing by Rod Nickel