March 8, 2011 / 1:32 PM / 7 years ago

Canadian dollar ends higher, looks vulnerable to oil trade

TORONTO (Reuters) - The Canadian dollar edged up to a higher close against the U.S. currency on Tuesday as oil prices trimmed losses suffered after Kuwait’s oil minister said OPEC was considering boosting production for the first time in more than two years.

The commodity-linked Canadian dollar -- which often reacts to oil prices because of the country’s large oil exports -- rose to C$0.9707 to the U.S. dollar, or $1.0302, up slightly from its overnight high of C$0.9711. It remained locked in the broad range between C$0.97 and C$0.98 that it has been in for more than a week.

“There’s not really any clear evidence for it to break C$0.97, but you also have one of the major economic reports for Canada that’s going to be coming out later this week,” said David Watt, senior currency strategist at RBC Capital Markets.

“I think today is position- and range trading as opposed to anything fundamental going on.”

The Canadian dollar finished at C$0.9714 to the U.S. dollar, or $1.0294, up from C$0.9729 to the U.S. dollar, or $1.0279, at Monday’s close.

While near-term market focus remains on the price of oil and developments in Libya, several high-profile pieces of Canadian data are still to come and may help determine the timing of Canadian interest rate hikes.

Market players will be searching for evidence that the Canadian economy recovery has momentum when they look at the January trade and February jobs figures that are due on Thursday and Friday, respectively.

VULNERABLE TO OIL

The currency could be ripe for a steep fall if crude prices slide from the 2-1/2 year highs that have been fueled by unrest in Libya and oil disruption worries.

Michael O‘Neill, managing director at Knightsbridge Foreign Exchange, said that if oil retreats to below $100 a barrel, the Canadian dollar would probably follow suit and tumble toward C$0.9850, a level not seen in more than a week.

“If oil prices retreat a bit further, the extremely short U.S. dollar/Canada dollar positions are going to get unwound. It’s vulnerable for a correction,” he said.

“I think everything that made Canada strong is priced in. All the good news is in the current level, maybe more. I think the market has gotten ahead of themselves.”

BONDS FALL

Canadian government bonds prices fell across the curve on Tuesday, mirroring U.S. Treasuries, which absorbed one tranche of the $66 billion in new U.S. supply set to come out this week.

There was solid demand in the sale of $32 billion in three-year Treasury notes.

Bonds were also undermined by a rise in U.S. stocks and a falling oil price.

“Canada is piggybacking on the U.S.,” said David Tulk, chief Canada macro strategist at TD Securities. “The U.S. is being driven by risk assets that manage to overcome the hurdle of more sovereign weakness in Europe.”

The sovereign debt problems of some euro-zone nations have crept back into headlines after two agencies recently slashed their ratings on the debt of Greece and Spain, though North American bonds have not caught a safe-haven bid.

The two-year bond was down 5 Canadian cents to yield 1.882 percent, while the 10-year bond fell 34 Canadian cents to yield 3.397 percent. Canadian bonds underperformed their U.S. counterparts across the curve, except in the three-year issue.

Canada will auction C$3 billion of two-year notes on Wednesday.

Reporting by Ka Yan Ng; editing by Peter Galloway

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