February 8, 2016 / 10:04 PM / 2 years ago

Canadian dollar weakens as oil falls, stocks slump

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

TORONTO (Reuters) - The Canadian dollar lost ground against its U.S. counterpart on Monday as a sell-off in stocks and a drop in oil prices weighed on the risk-sensitive commodity currency, while Canada’s 10-year government bond yield hit a record low.

Investors shed risky assets as worries persisted over the pace of global growth.

The weakness was muted by the greenback’s own slip against a basket of currencies, pressured by a view that the Federal Reserve would be cautious with its plan to raise U.S. interest rates.

The Canadian dollar CAD=D4 ended the session trading at C$1.3934 to the greenback, or 71.77 U.S. cents, weaker than Friday’s official close of C$1.3908, or 71.90 U.S. cents.

The loonie, as Canada’s currency is colloquially known, has traded in a wide range so far this year, starting at C$1.38 before slumping to almost C$1.47 in mid-January and then recovering to as strong as C$1.3640 last week.

The currency will likely remain volatile in coming weeks given the potential for swings in the price of oil, a major Canadian export, according to Matt Perrier, managing director of foreign exchange sales at Bank of Montreal.

“If we were to see crude fall back into the mid-$20s (a barrel) then I wouldn’t be surprised to see dollar/Canada trade back up in the C$1.43-C$1.44 area,” Perrier said.

If oil instead approaches $40 a barrel the Canadian currency could test levels around C$1.35, he said.

U.S. crude CLc1 prices settled almost 4 percent lower at $29.69 a barrel after a Saudi-Venezuela meeting showed few signs that steps would be taken to boost prices. [O/R]

Canada’s main stock index fell 1.8 percent. [.TO]

Speculators have trimmed bearish bets against the Canadian dollar, a week after they hit their highest in five months, data showed on Friday.

Canadian government bond prices were higher across the maturity curve amid a flight to safety, while the curve flattened as the long end outperformed.

The two-year CA2YT=RR price rose 5 Canadian cents to yield 0.345 percent and the benchmark 10-year CA10YT=RR was up 72 Canadian cents, pushing its yield to a record low at 1.054 percent.

A Bank of Canada official said central bankers cannot take primary responsibility for upholding financial stability because interest rates are too blunt an instrument to address potential problems in just one part of the economy.

Additional reporting by Fergal Smith; Editing by Bernadette Baum and James Dalgleish

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