Canadian dollar weakens as oil slips, Bank of Canada eyed

TORONTO (Reuters) - The Canadian dollar weakened sharply against its U.S. counterpart on Monday as oil prices fell and global equities rose after Japan’s prime minister won re-election and ordered fresh stimulus.

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

Friday’s bumper U.S. jobs data continued to lend support to the greenback, and to bets that the U.S. Federal Reserve would tighten credit before the end of the year.

Canadian monetary policy will be back in focus this week, with the Bank of Canada due to decide on interest rates and update its outlook on Wednesday, following last week’s weak jobs and trade data.

“I think the market is overpricing the potential for a rate cut in Canada and underpricing the potential for a rate hike in the States,” said Don Mikolich, executive director for foreign exchange sales at CIBC Capital Markets.

Canada’s economy shed jobs in June, and other data from last week also pointed to tepid activity. Canadian housing starts rose much more than expected in June from May, data showed on Monday.

“It doesn’t have that same feeling of inevitable improvement (as the U.S. economy),” Mikolich said. “We muddle along and the currency is reflecting that.”

The Canadian dollar CAD=D4 settled at C$1.3121 to the greenback, or 76.21 U.S. cents, much weaker than the Bank of Canada's official Friday close of C$1.3040, or 76.91 U.S. cents.

The currency’s strongest level of the session was C$1.3030, while its weakest level was C$1.3140.

Oil prices fell to a two-month low on extended selling after the market’s break below a key technical support level last week due to oversupply fears. [O/R]

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR price down 1.5 Canadian cents to yield 0.473 percent and the benchmark 10-year CA10YT=RR falling 20 Canadian cents to yield 0.981 percent.

The Canada-U.S. two-year bond spread was -18.4 basis points, while the 10-year spread was -44.9 basis points.

The Canadian dollar was underperforming most European currencies and the Australian and New Zealand dollars, but was stronger against the yen.

Japanese Prime Minister Shinzo Abe ordered a new round of fiscal stimulus spending after a crushing election victory over the weekend.

Reporting by Alastair Sharp; Editing by Nick Zieminski and Richard Chang