C$ weakens on widening Canada-U.S. yield spreads

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, pressured by the recent fall in Canada’s bond yields below U.S. yields as investors braced for divergence in monetary policy between the Federal Reserve and the Bank of Canada.

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

Losses for the loonie came despite higher prices for oil, one of Canada’s major exports, as producers showed signs of adhering to a global deal to reduce output.

U.S. crude CLc1 prices were up 1.02 percent at $51.42 a barrel.

The U.S. dollar .DXY held onto gains since the Fed on Wednesday increased interest rates and signaled increases would follow at a faster pace next year.

Wider short-term spreads between Canada and the U.S. “remain significant net drags” on the Canadian dollar, Shaun Osborne, chief FX strategist at Scotiabank, said in a research note.

Canada’s two-year yield has fallen 4 basis points further below its U.S. equivalent this week to a spread of -43 basis points.

Strategists expect the spread to widen to as much as -80 basis points by the end of 2017 as the Bank of Canada shows no desire to follow Fed rate increases.

At 9:30 a.m. EST (1430 GMT), the Canadian dollar CAD=D4 was trading at C$1.3385 to the greenback, or 74.71 U.S. cents, weaker than Thursday's close of C$1.3347, or 74.92 U.S. cents.

The currency’s strongest level of the session was C$1.3320, while its weakest was C$1.3391.

On Thursday, the loonie touched its weakest level in two weeks at C$1.3417.

Foreign investors bought a net C$15.75 billion in Canadian securities in October, mainly in corporate debt securities, up from C$11.79 billion in September, Statistics Canada said.

Canadian government bond prices were mixed across the yield curve. The two-year CA2YT=RR was flat to yield 0.825 percent and the benchmark 10-year CA10YT=RR dipped 2 Canadian cents to yield 1.835 percent.

The 10-year yield on Thursday touched its highest level since June 2015 at 1.859 percent.

Reporting by Fergal Smith; Editing by Paul Simao