TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday as a drop in oil prices offset a pullback for the greenback against a basket of major currencies.
Oil was dragged lower by uncertainty over whether the Organization of the Petroleum Exporting Countries will reach an output deal, after Saudi Arabia said it will not attend talks on Monday with non-OPEC producers to discuss supply cuts. [O/R]
“The only story around today is that oil’s 3 percent weaker and there was some profit-taking on long U.S. dollar positions,” said Darcy Browne, managing director of foreign exchange sales at CIBC Capital Markets.
Oil is one of Canada’s major exports.
The Canadian dollar CAD=D4 ended at C$1.3527 to the greenback, or 73.93 U.S. cents, weaker than Thursday’s close of C$1.3491, or 74.12 U.S. cents. It dipped 0.1 percent on the week.
The losses for the loonie came as Canada’s 10-year yield fell 2.7 basis points below its U.S. equivalent to leave a spread of -79.4 basis points. On Wednesday, the spread hit its widest in 10 months at -81.9 basis points.
A wider spread reduces investor incentive to buy lower-yielding Canadian bonds, trimming demand for Canadian dollars.
Browne said he expects further weakness for the currency, and is watching the 50 percent retracement of the January peak to May trough at C$1.3575, which it barely breached on Nov. 14.
“If we can get a little traction over that level I think we can push higher again and the Canadian dollar should probably end up a little weaker into the end of the year,” he said.
U.S. crude oil futures CLc1 settled $1.90 lower at $46.06 a barrel.
The U.S. dollar .DXY on Friday pared some recent gains. Still, expectations of rises in U.S. inflation and interest rates have driven the greenback to a more than 6 percent gain against a basket of major currencies over October and November.
The market is underestimating the prospect of further interest rate cuts from the Bank of Canada, some economists said, as an uncertain outlook for the NAFTA trade accord following Donald Trump’s U.S. presidential election win risks derailing an expected pick-up in Canada’s business spending.
Canadian government bond prices were higher across a flatter yield curve, with the two-year CA2YT=RR up 2.5 Canadian cents to yield 0.673 percent and the benchmark 10-year CA10YT=RR rising 24 Canadian cents to yield 1.56 percent.
Additional reporting by Fergal Smith; Editing by Meredith Mazzilli and Lisa Shumaker