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TORONTO (Reuters) - The Canadian dollar closed lower versus the U.S. dollar on Monday as the likelihood of a Bank of Canada rate cut and a dovish bank statement more than offset the benefit of record high oil prices.
Bond prices finished higher across the curve as disappointing results from Bank of America Corp triggered a rally, and the rate-cut expectations convinced dealers to hang on to more secure assets such as government debt.
The Canadian dollar closed at C$1.0060 to the U.S. dollar, or 99.40 U.S. cents, down from C$1.0049 to the U.S. dollar, or 99.51 U.S. cents, at Friday's close.
A jump in crude oil prices to a record high above $117 a barrel helped the Canadian currency shoot above parity versus the greenback early in the day. It hit a session high of US$1.0002, valuing a U.S. dollar at 99.98 Canadian cents.
But it pulled back on expectations that the Bank of Canada will cut its key overnight rate by 50 basis points to 3.00 percent on Tuesday and leave the door open to another cut when it sets interest rates in June.
"You've got the backdrop of high oil prices and commodities are doing well, which should be Canadian-dollar positive," said David Watt, senior currency strategist at RBC Capital Markets.
"But you also have the Bank of Canada, which has expressed concern about the U.S. slowdown impact on the Canadian economy and tight finance conditions, and they are going to be cutting interest rates and probably leaving the door open to more."
Since slashing rates by a half-percentage point in March, the Bank of Canada has remained downbeat, but has also shied away from offering the market any hint on how big its next interest rate cut will be.
Nearly all of Canada's primary security dealers expect the central bank to cut its key overnight rate by 50 basis points, according to a Reuters poll taken last week after data showed Canada's core inflation slowed more than expected in March.
After hitting its session high, the Canadian dollar fell just over half a cent before settling into a tight range for the second half of the North American session.
Canadian bond prices were in demand after disappointing quarterly results from Bank of America, and they hung onto their gains as the market eventually shifted its focus to the widely expected Bank of Canada rate cut on Tuesday.
"The market is built up for another half-point cut from the Bank of Canada tomorrow and the easing door swinging open," said Sal Guatieri, senior economist at BMO Capital Markets.
"The bank might tone down its commitment to ease further, perhaps suggesting that downside risks, while they remain, have not intensified."
Data released early in the session showed foreigners bought C$3.8 billion worth of Canadian securities in February, the largest monthly amount since April 2007.
The two-year bond rose 5 Canadian cents to C$101.86 to yield 2.834 percent. The 10-year bond increased 18 Canadian cents to C$102.58 to yield 3.663 percent.
The yield spread between the two- and 10-year bonds was 82.9 basis points, unchanged from the previous close.
The 30-year bond ended up 38 Canadian cents at C$114.83 to yield 4.120 percent. In the United States, the 30-year treasury yielded 4.482 percent.
The three-month when-issued T-bill yielded 2.55 percent, unchanged from the previous close.
Editing by Peter Galloway