Canadian dollar hits 14-month low as oil price tumbles

TORONTO (Reuters) - The Canadian dollar slumped on Tuesday to a 14-month low against its U.S. counterpart as a drop in the price of oil, one of Canada’s major exports, added to recent pressure on the currency.

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

Brent crude oil prices fell to their lowest level in over five months, erasing all of the gains since the Organization of the Petroleum Exporting Countries agreed to cut production at the end of November, while U.S. crude oil futures settled 2.4 percent lower at $47.66 a barrel.

“This is a lay-up trade right now to sell Canada almost across the board,” said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets.

An uncertain outlook for the North American Free Trade Agreement and mortgage market concerns are also headwinds for the loonie, while investors are awaiting a Federal Reserve interest rate decision on Wednesday.

The Fed is expected to hold interest rates steady as it pauses to parse more economic data, but it may hint it is on track for an increase in June.

In contrast, the funding crisis at mortgage lender Home Capital may spark a welcome cooling in Canada’s housing market and take pressure off the Bank of Canada to raise interest rates.

Chances of an interest rate hike this year have evaporated, data from the overnight index swaps market shows. As recently as Friday, there was a one-in-four chance implied. BOCWATCH

At 4 p.m. EDT (1600 GMT), the Canadian dollar CAD=D4 was trading at C$1.3715 to the greenback, or 72.91 U.S. cents, weaker than Monday's close of C$1.3681, or 73.09 U.S. cents, according to Reuters data.

The currency’s strongest level of the session was C$1.3651, while it touched its weakest level since February 2016 at C$1.3758.

Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries as weak U.S. auto sales pointed to slowing economic growth. The two-year CA2YT=RR rose 7.5 Canadian cents to yield 0.682 percent, and the 10-year CA10YT=RR climbed 53 Canadian cents to yield 1.519 percent.

The two-year spread fell 2.1 basis points further below its U.S. equivalent to a spread of -58.3 basis points, its widest since January 2016.

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

Reporting by Fergal Smith; Editing by Leslie Adler