Canadian dollar weakens as oil dips, greenback rebounds

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Monday, paring recent gains as investors adopted a cautious tone ahead of a Bank of Canada interest rate decision midweek and the inauguration of U.S. President-elect Donald Trump on Friday.

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

“We do have quite a bit of event risk later in the week, so I think the market is taking today as an opportunity to take a breather,” said Blake Jespersen, managing director for foreign exchange sales at BMO Capital Markets, noting that activity was subdued with U.S. markets closed for Martin Luther King Jr. Day.

“There’s definitely some caution that’s set in now, Jespersen said. “People are reassessing their views on Trump and what he’s actually going to do.”

The Canadian dollar CAD=D4 settled at C$1.3187 to the greenback, or 75.83 U.S. cents, weaker than Friday's close of C$1.3126, or 76.18 U.S. cents.

The currency’s strongest level of the session was C$1.3102, while its weakest was C$1.3188. On Thursday, the loonie had touched a near 3-month high at C$1.3028.

The U.S. dollar .DXY rose after suffering its worst week since November. It was hit last week by a perceived lack of clarity over what Trump will do once he assumes office.

Analysts expect the Bank of Canada to leave its policy rate on hold at 0.5 percent at Wednesday’s announcement, where the central bank will also update its economic forecasts.

The possibility that Trump will follow through on protectionist rhetoric has dented the outlook for Canada’s economy, with nearly half of economists polled recently paring back growth forecasts.

Prices of oil, one of Canada’s major exports, settled higher as Saudi Arabia said it would adhere strictly to its output reduction commitment, although expectations for rising U.S. production hung over the market.

Speculators have raised bearish bets on the Canadian dollar. Net short Canadian dollar positions rose to 7,935 contracts as of Jan. 10 from 3,871 a week earlier, data from the Commodity Futures Trading Commission and Reuters calculations showed on Friday.

Canadian government bond prices were higher across the yield curve as investors sought shelter in safe haven assets as uncertainty over Britain’s departure from the European Union and the policies of Trump curbed appetite for risk.

The two-year CA2YT=RR price rose 1.5 Canadian cents to yield 0.792 percent and the 10-year CA10YT=RR climbed 17 Canadian cents to yield 1.695 percent.

Additional reporting by Fergal Smith; Editing by Nick Zieminski and Bill Rigby