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Wednesday, August 17, 2022

C$ falls as China’s surprise devaluation hits oil price

C$ falls as China's surprise devaluation hits oil priceTORONTO: The Canadian dollar dropped against its US counterpart on Tuesday, reversing the previous session’s hefty gains, as oil prices took a beating following China’s surprise move to devalue its currency.

The yuan had its biggest decline in more than two decades after the Chinese central bank devalued it by nearly 2 percent overnight in China’s latest attempt to bolster its economy following a string of poor economic data.

China is one of the world’s largest natural resource consumers, and the move triggered a selloff in dollar-priced commodities, such as crude, which is a key Canadian export.

Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets, said that with oil near multi-year lows, “it’s not good news for the Canadian dollar, that’s for sure”.

“It’s a big move from China’s perspective, but a 2 percent move in the currency is not a big one from a global perspective. You get 2 percent moves in most floating currencies on a somewhat regular basis, especially these days.”

At 9:58 a.m. ET (1358 GMT), the Canadian dollar was at C$ 1.3109 to the greenback, or 76.28 US cents, weaker than the Bank of Canada’s official close of C$ 1.3001, or 76.92 US cents.

It has tumbled more than 20 percent in a little over a year. It traded between C$ 1.2996 and C$ 1.3109 on Tuesday, but was well off the 2004 lows above C$ 1.32 hit last week.

US crude was down 3.56 percent at $ 43.36 a barrel, while Brent crude lost 2.66 percent to $ 49.07.

A slowdown in China’s economy, which is still expected to grow by around 7 percent this year, has been a key driver for oil’s plunge over the past year along with rising global supplies.

It is too early to speculate on the longer-term impact of the yuan devaluation, Reitzes said, adding that it should not derail the US Federal Reserve’s plan to tighten monetary policy. Some market participants, however, may view the move as a trigger for a currency war, which could further strengthen the greenback, he added.

Canadian government bond prices were higher across the maturity curve, with the two-year price up 6 Canadian cents to yield 0.43 percent and the benchmark 10-year rising 68 Canadian cents to yield 1.402 percent.

The Canada-US two-year bond spread narrowed to -24.3 basis points, while the 10-year spread narrowed to -74.8 basis points.

Copyright Reuters, 2015

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