CANADA FX DEBT-C$ weakens as wider Canada-U.S. yield spreads weigh
(Add analyst quotes and details on bond spreads; updates prices) * Canadian dollar ends at C$1.3417, or 74.53 U.S. cents * Bond prices higher across a flatter yield curve By Fergal Smith TORONTO, Dec 19 (Reuters) - The Canadian dollar weakened to a near three-week low against its U.S. counterpart on Monday as the recent drop in Canadian yields below U.S. Treasuries weighed, with the market bracing for divergence in monetary policy between the United States and Canada. The loonie fell 1.2 percent last week after the Federal Reserve raised U.S. interest rates and signaled increases would follow at a faster pace next year. "I think what you have seen over the last week or so has been a bit of catch-up from the Canadian dollar in terms of rate differentials, which had moved against it since the (U.S.) election," said Ian Gordon, FX strategist at Bank of America Merrill Lynch. Canada's 2-year yield has fallen more than 15 basis points further below its U.S. equivalent since before the election, widening to a spread of -42.2 basis points. Strategists expect the spread to stretch to as much as -80 basis points by the end of 2017 as the Bank of Canada shows no desire to follow Fed increases. The Canadian dollar ended at C$1.3417 to the greenback, or 74.53 U.S. cents, weaker than Friday's close of C$1.3344, or 74.94 U.S. The currency's strongest level of the session was C$1.3319, while it touched its weakest since Dec. 1 at C$1.3423. "The Canadian dollar had been one of the best performers since the election. It arguably had the most catching up to do in terms of the (U.S.) dollar rally," Gordon said. Higher prices for oil, one of Canada's exports, had helped support the loonie in recent weeks after OPEC cut supply for the first time in eight years. U.S. crude prices settled up 22 cents at $52.12 a barrel. The U.S. dollar was underpinned by expectations that a fiscal expansion planned by U.S. President-elect Donald Trump will quicken inflation and lead to a faster pace of interest rates hikes. Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The two-year rose 4 Canadian cents to yield 0.801 percent and the benchmark 10-year climbed 39 Canadian cents to yield 1.787 percent. On Thursday, the 10-year yield touched its highest since June 2015 at 1.859 percent. Bank of Canada Governor Stephen Poloz said rising global protectionism could drive up the cost of goods and cause job losses, but dismissed the conclusion that Canadian exports will suffer under a Trump administration. (Reporting by Fergal Smith, editing by G Crosse)
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