CANADA FX DEBT-C$ hits 1-week low as oil drops on Suez calm
* C$ ends session at C$0.9946 vs greenback, or $1.0054
* Bond prices track U.S. Treasuries lower (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, Feb 8 (Reuters) - Canada's currency slid to a one-week low against the U.S. dollar on Tuesday as oil prices were undermined by news that Suez Canal operations were unaffected by strikes, calming concerns about Mideast supplies.
China's move to raise interest rates for the second time in just over a month to tame inflation was already pressuring U.S. crude futures early in the day even as markets were keeping a close watch on events in Egypt. [O/R]
By afternoon, the currency CAD=D4 had slid nearly a penny from the day's overnight high to as low as C$0.9978 versus the greenback, or $1.0022, its weakest level since Feb. 1.
"The Canadian dollar, whether we like it or not, is thought of as a petro currency," said Carlos Leitao, chief economist at Laurentian Bank of Canada.
"I think the oil price change is more a return to reality," he said, noting that prices last week appreciated too fast due to fears that the Suez Canal could be shut down.
U.S. crude oil futures ended 0.6 percent lower at $86.94 a barrel on Tuesday, the lowest close since Jan. 27.
C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets, said that if U.S. oil prices retreat to the low $80s to high $70s range, the Canadian dollar could weaken by another couple of cents, sliding back below parity with its U.S. counterpart.
The Canadian dollar CAD=D4 closed the North American session at C$0.9946 to the U.S. dollar, or $1.0054, down from Monday's North American close of C$0.9902, or $1.0099.
Not helping the currency, figures on Tuesday showed Canadian housing starts rose only a modest 0.8 percent in January.
The data showed that strength in rural areas offset dips in urban markets, suggesting the once buoyant housing sector may continue to weigh on economic growth. [ID:nN08273018]
Canadian government bond prices were softer across the curve, following a bigger move in U.S. Treasuries, which extended losses after investors demanded to be paid higher yields in a $32 billion sale of new three-year notes. [US/]
The two-year bond CA2YT=RR fell 9 Canadian cents to yield 1.878 percent, while the 10-year bond CA10YT=RR dropped 42 Canadian cents to yield 3.487 percent.
"Bond markets are still trying to come to grips with whether the commodity price inflation that we've seen ... is going to translate into a sustained increase in inflation in the North American and the European markets," said Laurentian's Leitao.
"I don't think it is, so I would expect yields to come back down again at some point in the near term, but until and unless markets get a bit more comfortable with the inflation outlook, I think yields will be under upward pressure." (Reporting by Claire Sibonney; editing by Peter Galloway)
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