Surging bond yields spook investors, capping C$ gains

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Tuesday as oil prices rose, but the move was limited as investors worried that the continued march higher in bond yields would tip the global economy into recession.

The loonie was trading 0.1% higher at 1.3720 to the U.S. dollar, or 72.89 U.S. cents, after trading in a range of 1.3641 to 1.3775. On Monday, it touched its weakest intraday level since May 2020 at 1.3808.

"It's impossible to find a bid for bonds," said Adam Button, chief currency analyst at ForexLive. "The chances of a financial or economic crisis are climbing and that directly impacts the outlook for the Canadian economy."

Canada is a major producer of commodities, including oil, so the loonie is particularly sensitive to the global economic outlook.

"We have gone from pricing in the chance of a global recession into a likelihood of a global recession," Button said.

The U.S. 10-year yield, a major benchmark for borrowing costs globally, climbed to a fresh 12-year high and Wall Street sank deeper into a bear market.

As higher borrowing costs slow Canada's outsized housing market, investors are betting the Bank of Canada will raise interest rates to a lower end-point than the Federal Reserve, an outcome that could spell more trouble for the Canadian dollar.

Oil clawed back some of its recent decline, supported by supply curbs in the U.S. Gulf of Mexico ahead of Hurricane Ian. U.S. crude oil futures settled 2.3% higher at $78.50 a barrel.

Canadian government bond yields rose across much of a steeper curve. The 10-year touched its highest level since June 29 at 3.361% before dipping to 3.297%, up 7 basis points on the day.

(Reporting by Fergal Smith; Editing by Alistair Bell)