Canadian dollar falls as China stock sell-off spooks investors

The Canadian dollar weakened against its U.S. counterpart on Tuesday, as a sharp drop in China’s equity market weighed on sentiment and a record low for U.S. bond yields after adjusting for inflation signalled worries about the economic outlook.

The loonie was trading 0.4% lower at 1.2589 to the greenback, or 79.43 U.S. cents, after trading in a range of 1.2538 to 1.2594.

“Today’s market price action has been driven by events in China and the impact it has had on broader market sentiment,” said Simon Harvey, senior FX market analyst for Monex Europe and Monex Canada.

U.S. stocks fell from record highs while real U.S. bond yields hit all-time lows, as further selling of Chinese internet giants, economic growth concerns and a Federal Reserve interest rate decision on Wednesday put some investors on guard and drove profit-taking.

Canada is a major producer of commodities, including oil, so its economy tends to be sensitive to the outlook for global growth. U.S. crude prices settled 0.4% lower at $71.65 a barrel.

The Bank of Canada’s pledge to let the economy run hot could be tested by inflation that’s already at a decade-high level, with more price increases expected as businesses shuttered during the COVID-19 pandemic reopen and consumers dip into record savings.

The Canadian Consumer Price Index report for June is set for release on Wednesday, which will include updated weights for the basket of goods and services used in the index. Shifts include a higher weighting for the shelter component as housing prices soar.

Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year fell 5.4 basis points to 1.169% but holding above the five-month low hit last Tuesday at 1.104%.

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