Canadian dollar weakens as oil falls, greenback gains

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday, pressured by lower oil prices and broader gains for the greenback as investors weighed how the policies of U.S. President-elect Donald Trump could affect trade and economic growth.

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

Canadian government bond prices were lower across a steeper yield curve in sympathy with U.S. Treasuries as investors bet that Trump will enact policies that stoke inflation.

But with Canada unlikely to match any future U.S. rate hikes due to tepid growth, some analysts say spreads between the two countries yields should widen, putting further pressure on the Canadian currency.

The Canadian central bank cut rates twice last year as a plunge in oil prices hit the economy. The bank has held rates at 0.50 percent since July 2015, but acknowledged after its policy meeting last month that it had considered cutting again.

Darcy Browne, managing director of foreign exchange sales at CIBC Capital Markets, said the loonie could hit C$1.40 before Trump’s inauguration in January.

The Canadian dollar CAD=D4 settled at C$1.3483 to the greenback, or 74.17 U.S. cents, much weaker than Wednesday's close of C$1.3378, or 74.75 U.S. cents.

However, over the longer term, Trump’s promise to cut taxes and spend on infrastructure could help Canada’s export-driven economy, Browne said.

“If he does ‘make America great again,’ we can probably ride the coattails,” Browne said. “If you’re talking a massive infrastructure build in the United States, it requires raw materials, most of which we probably have and can help provide,” Browne said.

Also weighing on the Canadian currency, oil prices settled more than 1 percent lower as attention turned back to oversupply concerns and whether OPEC will later this month decide to cut production.

“Before money is going to come back into our country we need oil at $65” a barrel, Browne said.

Brent crude LCOc1 settled 54 cents lower at $45.84 a barrel and U.S. West Texas Intermediate crude Clc1 ended 61 cents lower at $44.66. [O/R]

The price of a two-year CA2YT=RR Canadian bond fell 7.5 Canadian cents to yield 0.628 percent and the benchmark 10-year CA10YT=RR lost 56 Canadian cents to yield 1.432 percent. The yields on both were the highest since May.

The currency’s strongest level of the session was C$1.3386, while its weakest was C$1.3509. On Wednesday, the loonie touched an eight-month low at C$1.3525.

In domestic data, new home prices rose 0.2 percent in September from the previous month, Statistics Canada said.

Additional reporting by Fergal Smith, editing by G Crosse