The Canadian dollar strengthened against its US counterpart as Wall Street recovered on Wednesday. However, gains in the commodity-linked currency were limited as investors remained skeptical about China's measures to support its struggling economy.
The loonie rose 0.2% to trade at 1.3465, or 74.27 US cents, to the dollar, extending the previous day's gains. It traded between 1.3456 to 1.3493.
“The Canadian dollar has done well over the last day and a half, but I think we're pulling back now because commodities aren't really buying the China bailout story,” said Eric Brager, director of risk management at FX & Precious Metals. Silver Gold Bull.
Canada, a major producer of commodities such as copper, fell 1.3% to a three-week low.
The dismissal of the head of China's securities regulator was greeted with muted applause by markets as investors awaited major action to get to the root of the problem in the world's second-largest economy.
Major stock indexes rose on Wall Street, with the S&P 500 hitting a new record high, while the U.S. dollar lost ground against a basket of major currencies.
The Canadian dollar is expected to appreciate next year if the US Federal Reserve cuts interest rates as expected. However, its gains could be limited as mortgage extensions weigh on housing spending and economic growth, according to a Reuters poll.
When members of the Bank of Canada's governing council decided to leave the federal funds rate on hold on Jan. 24, they expressed concern that current inflation could drive down borrowing costs too soon.
Canadian government bonds rose across the spectrum. The 10-year note rose 4.5 basis points to 3.473%, while it has risen 45 basis points since December. (Reporting by Fergal Smith; Editing by Sandra Maler)
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