Canadian Dollar Declines as Slowing Oil Prices Reduce Expectations for Interest Rate Cuts

Canadian Dollar Edges Lower Amid Oil Price Slump

TORONTO, May 6 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday, as a sharp drop in the price of oil led to reduced bets that the Bank of Canada would raise interest rates this year. The price of oil, one of Canada's major exports, fell to two-week lows, driven by optimism about a possible end to the war in the Middle East, with reports suggesting the United States and Iran were nearing an initial peace deal.

The price of oil plummeted 6.9% to $95.24 a barrel, with U.S. crude oil futures trading at this level. This sharp decline in oil prices may have a limited impact on the Canadian dollar's sentiment, as a sustained drop in oil prices would counter recent concerns about Bank of Canada policy tightening risks later this year, driven by inflationary pressures.

The Bank of Canada has stated that if oil prices remained high and began pushing up inflation, it might respond with consecutive interest rate hikes. Investors have priced in about 45 basis points in tightening by December, down from 60 basis points earlier this week. The loonie was trading 0.2% lower at 1.3640 per U.S. dollar, or 73.31 U.S. cents, after moving in a range of 1.3579 to 1.3641.

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In contrast to the Canadian dollar, all other G10 currencies notched gains against the U.S. dollar, with the exception of the Norwegian crown. Norway is also a major oil producer. On the domestic front, the Ivey Purchasing Managers Index (PMI) rose on a seasonally adjusted basis to 57.7 last month from 49.7 in March, marking its highest level since September.

Ivey PMI Comparison

Canadian bond yields fell across the curve, with the 10-year yield dropping 9.9 basis points to 3.515%. This decline extends the yield's pullback from a near six-week high on Monday at 3.638%.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline