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The Canadian dollar CADUSD strengthened against its U.S. counterpart on Tuesday, adding to its gains since the start of the year, as investors cheered U.S. data showing labour costs increasing at a slower pace.

The loonie was trading 0.6 per cent higher at 1.33 to the greenback, or 75.19 U.S. cents, at near its strongest level in more than two months, which it touched on Monday at 1.3297.

For January, it was up 1.9 per cent, its biggest monthly advance since October 2021, as signs of easing inflation bolstered risk appetite.

U.S. labour costs increased at their slowest pace in a year in the fourth quarter as wage growth slowed, giving the Federal Reserve, which is due to make an interest rate decision on Wednesday, a boost in its fight against inflation.

“It’s an encouraging development for the Fed … that helped to support equity markets,” said Mazen Issa, a senior FX strategist at TD Securities. “There is a pretty strong relationship between equity markets currently and FX markets, including the CAD.”

Major U.S. stock indexes rose, the U.S. dollar fell against a basket of major currencies and the price of oil, one of Canada’s key exports, settled 1.25 per cent higher at $78.87 a barrel.

The Canadian economy grew 0.1 per cent in November, matching forecasts, while a preliminary estimate showed a flat reading for December and annualized gross domestic product in the fourth quarter was likely up 1.6 per cent, above the Bank of Canada’s forecast of 1.3 per cent.

Canadian government bond yields rose across the curve.

The 2-year was up 2.9 basis points at 3.774 per cent, while the gap compared to the equivalent U.S. rate narrowed by 8.3 basis points to about 43 basis points in favour of the U.S. bond.