Canadian dollar shakes off plunge in oil as investors brace for rate hike

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Tuesday as investors maintained bets that the Bank of Canada will hike interest rates on Wednesday even as oil prices plunged.

At 3:43 p.m. (1943 GMT), the Canadian dollar CAD=D4 was trading 0.1 percent higher at 1.3088 to the greenback, or 76.41 U.S. cents.

The currency, which on Friday hit its weakest level in more than five weeks at 1.3132, traded in a narrow range of 1.3082 to 1.3123.

“I think it is in a holding pattern, waiting for the Bank of Canada tomorrow,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

The central bank, which sees Canada’s economy operating near capacity, has hiked four times since July 2017 to leave its key policy rate at 1.50 percent.

Chances of a rate increase on Wednesday held at more than 90 percent despite further volatility in global equity markets and a sharp drop in the price of oil, one of Canada’s major exports. BOCWATCH

U.S. crude oil futures CLc1 settled 4.2 percent lower at $66.43 a barrel as the sell-off in stocks raised worries about demand growth and after Saudi Arabia said it could supply more crude quickly if needed, easing concerns ahead of U.S. sanctions on Iran.

Canada runs a current account deficit, so its economy could be hurt if the global flow of trade or capital slows.

A deep discount for Canadian heavy crude could explain why the slump in U.S. oil prices had little impact on the loonie, Cieszynski said.

“We didn’t participate as much when (U.S.) oil was going up so therefore we haven’t been getting hit when it goes back down,” he said.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries as investors sought safety in low-risk debt.

The two-year CA2YT=RR rose 3.5 Canadian cents to yield 2.277 percent and the 10-year CA10YT=RR climbed 30 Canadian cents to yield 2.449 percent.

The 10-year yield touched its lowest intraday since Sept. 28 at 2.418 percent.