CANADA FX DEBT-C$ weakens as oil dips, Yellen bolsters U.S. rate hike bets

Fri May 27, 2016 5:40pm EDT
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(Adds analyst quotes, details on Yellen and CFTC data, updates
    * Canadian dollar ended at C$1.3038, or 76.70 U.S. cents
    * Bond prices lower across the maturity curve

    By Fergal Smith
    TORONTO, May 27 (Reuters) - The Canadian dollar weakened
against its broadly firmer U.S. counterpart on Friday as oil
prices fell and after a speech by Federal Reserve Chair Janet
Yellen bolstered the case for a U.S. interest rate hike this
    The U.S. dollar strengthened against a basket of
major currencies after Yellen said the Federal Reserve should
raise interest rates "in the coming months" if the economy picks
up as expected and jobs continue to be generated. 
    The loonie was caught up in a "broad wave of U.S. dollar
buying," said Adam Button, currency analyst at ForexLive.
    It may weaken further if there is follow-through buying of
U.S. dollars when investors return after a long weekend in the
United States, he added.
    Oil fell for a second day in a row as some investors took
profit on a surge to seven-month highs. U.S. crude oil futures
 settled 15 cents lower at $49.33 a barrel.    
    Speculators only modestly reduced bullish bets on the
Canadian dollar, Commodity Futures Trading Commission data
showed. Net long Canadian dollar positions fell to 20,047
contracts in the week ended May 24 from 22,706 contracts in the
prior week.
    The market has remained "stubbornly long" the Canadian
dollar in the face of recent wildfires in Alberta and hawkish
comments from Fed officials, said Button.
    The Canadian dollar ended at C$1.3038 to the
greenback, or 76.70 U.S. cents, weaker than Thursday's close of
C$1.2970, or 77.10 U.S. cents.
    The currency's strongest level of the session was C$1.2970,
while its weakest was C$1.3068.
    On Thursday, the loonie posted a one-week high at C$1.2912
as oil briefly moved above $50 a barrel and after the Bank of
Canada was less dovish this week than some investors expected,
signaling the impact on the economy of the Alberta wildfires
will be transitory. 
    Canadian dollar-implied volatility, which traders use to
price options on the currency, has tumbled since the interest
rate decision and ahead of a U.S. holiday on Monday. For 3-month
options, implied volatility was at 9.415 percent on Friday, near
its lowest since January. 
    Canadian government bond prices were lower across the
maturity curve, with the two-year price down 6
Canadian cents to yield 0.649 percent and the benchmark 10-year
 falling 26 Canadian cents to yield 1.358 percent.
    The Canada-U.S. two-year bond spread was 1.2 basis points
more negative at -26.2 basis points as U.S. Treasuries

 (Reporting by Fergal Smith; Editing by Jeffrey Benkoe and Chizu