Canadian dollar weakens as bank ratings downgrade offsets oil rally

TORONTO (Reuters) - The Canadian dollar weakened on Thursday against its U.S. counterpart as a ratings downgrade for the country’s major banks weighed, offsetting higher oil prices.

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

Moody’s Investor Service downgraded the long-term ratings for six Canadian banks late on Wednesday, pointing to rising domestic consumer debt and the country’s elevated housing prices that leaves lenders more vulnerable to a slowdown in the Canadian economy.

“That was the catalyst that started the Canadian dollar selling off after yesterday’s close,” said David Bradley, director of foreign exchange trading at Scotiabank.

The currency touched a nearly one-week low of C$1.3770, or 72.62 U.S. cents, before paring losses in a move Bradley partly ascribed to a move higher in U.S. equities.

At 4 p.m. ET, the Canadian dollar CAD=D4 was trading at C$1.3693 to the greenback, or 73.03 U.S. cents, down 0.3 percent, according to Reuters data.

Last Friday it hit its weakest in 14 months at C$1.3793.

Speculators had already become bearish on the Canadian dollar in the face of depressed oil prices and a more uncertain trade outlook with the United States. The phenomenon of investors selling Canadian assets on the expectation that the country’s economy will suffer if a housing bubble pops has been called “The Great White Short.”

U.S. crude CLc1 prices were up 1 percent at $47.80 a barrel after a fall in U.S. inventories and a bigger-than-expected cut in Saudi supplies to Asia helped tighten the oil market. Oil is one of Canada's major exports.

“Commodity prices are all subdued right now. Iron ore, copper, gold, crude, everything has sold off over the last two to four weeks, which has put pressure on the currency,” Scotia’s Bradley said.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 2.5 Canadian cents to yield 0.709 percent and the 10-year CA10YT=RR rising 28 Canadian cents to yield 1.608 percent.

The spread between the lower yield on 2-year Canadian bonds versus their U.S. equivalent is near its widest since 2007.

The market is expecting the Federal Reserve to raise U.S. interest rates further next month but has largely given up on prospects of a hike this year from the Bank of Canada.

Additional reporting by Fergal Smith; Editing by Bernard Orr and James Dalgleish