Canadian dollar weakens as oil prices fall, Fed decision looms

TORONTO (Reuters) - The Canadian dollar weakened on Monday against its U.S. counterpart as oil prices fell and investors braced for an interest rate decision midweek from the U.S. Federal Reserve.

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

At 4:00 PM ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3674 to the greenback, or 73.13 U.S. cents, down from Friday's official close of at C$1.3650, or 73.26 U.S. cents. The currency traded in a range of C$1.3639 to C$1.3687.

“It could be tied to expectations as to what the Fed will say on Wednesday,” said Bipan Rai, Executive Director and Senior Macro Strategist.

Investors do not expect the U.S. central bank to raise rates this week. But interest rate futures are pricing a roughly 70 percent chance that the Fed will hike in June, according to the CME’s FedWatch.

Higher U.S. interest rates would support the greenback at the expense of the Canadian dollar, while the loonie has also been held back recently by lower oil prices, domestic mortgage market concerns and an uncertain outlook for the North American Free Trade agreement.

“There is a political premium priced into the loonie at this point due to NAFTA,” Rai said.

Last week, the loonie fell 1.1 percent. It touched on Friday its weakest since February 2016 at C$1.3697.

U.S. crude oil futures settled 49 cents lower on Monday at $48.84 a barrel, pressured by worries that Organization of the Petroleum Exporting Countries-led production cuts may not significantly tighten an oversupplied market in the short term.

Oil is one of Canada’s major exports.

Canadian government bond prices were mixed, with the curve steepening in sympathy with U.S. Treasuries after U.S. Treasury Secretary Steven Mnuchin said the government is looking into the issuance of ultra long-term bonds.

The two-year CA2YT=RR price rose 0.5 Canadian cent to yield 0.72 percent but the 10-year CA10YT=RR fell 25 Canadian cents to yield 1.577 percent.

Canada’s trade report for March is due on Thursday, and the April employment report is due on Friday.

Reporting by Fergal Smith Editing by W Simon and David Gregorio