Canadian dollar hits 5-month low as risk appetite ebbs

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a five-month low against its U.S. counterpart on Thursday as investors shunned risk-sensitive assets and bet that the Bank of Canada is finished raising interest rates in the current cycle.

The Canadian dollar was trading 0.4% lower at 1.3684 to the greenback, or 73.08 U.S. cents, after touching its weakest since March 28 at 1.3694.

"The Canadian dollar is taking it on the chin as global risk appetite deteriorates," said Karl Schamotta, chief market strategist at Corpay.

The S&P 500 and Nasdaq fell with Apple leading declines in megacap growth stocks on concerns over China's iPhone curbs, while a fall in weekly jobless claims stoked worries about sticky inflation.

Canada is a major producer of commodities, including oil, so the loonie is sensitive to shifts in investor sentiment. U.S. crude oil futures settled 0.8% lower at $86.87 a barrel.

Analysts have cut their bullish near-term forecasts for the currency as China's economy weakens and the gap between U.S. and Canadian bond yields grows, a Reuters poll showed.

Bank of Canada Governor Tiff Macklem said interest rates may not be high enough to bring inflation back down to target, one day after the central bank left its benchmark rate on hold at a 22-year of 5%.

It is a message that "keeps a 2023 rate hike on the table as a possibility if inflation pressures fail to subside but markets are likely to read this as the end to the Bank of Canada's tightening cycle," Schamotta said.

Money markets see a roughly 20% chance of another tightening over the coming months.

Canadian bond yields fell across the curve, tracking moves in U.S. Treasuries. The 10-year was down 4.8 basis points at 3.643%.

(Reporting by Fergal Smith; Editing by Marguerita Choy)