Canadian dollar slides 1% as economic data spooks Wall Street

The Canadian dollar CADUSD weakened to a six-day low against its U.S. counterpart on Monday, as investors worried that signs of U.S. economic resilience would extend the length of the Federal Reserve’s campaign to raise interest rates.

The loonie was trading 1% lower at 1.3601 to the greenback, or 73.52 U.S. cents, its weakest level since last Tuesday.

“The CAD is down as the movement in the currency continues to be more correlated with the S&P 500 then the price of oil,” said Tony Valente, senior FX dealer at AscendantFX.

“Right now, the market is taking good economic news as bad news for equities because it means that the Fed and the Bank of Canada would be hiking rates higher for longer.”

The main U.S. benchmarks dropped as investors fretted that better-than-expected service-sector activity challenged potential for a less aggressive stance by the Fed.

Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to shifts in investor sentiment.

The price of oil settled 3.8% lower at $76.93 a barrel even as more Chinese cities eased COVID-19 curbs in a positive sign for fuel demand.

As the Bank of Canada considers ditching oversized interest rate hikes, it’s dealing with an economy likely more overheated than previously thought but also the bond market’s clearest signal yet that recession and lower inflation lie ahead.

Money markets are betting on a 25-basis-point increase when the BoC meets to set policy on Wednesday but a slim majority of economists in a Reuters poll expect a larger move.

Canadian government bond yields rose across the curve, tracking the move in U.S. Treasuries.

The 10-year was up 5.7 basis points at 2.836%, after on Friday touching its lowest intraday level since Aug. 16 at 2.771%.

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