Canadian dollar weakens with oil but notches second straight weekly gain

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday as oil prices fell, but the loonie still advanced for a second consecutive week after the Bank of Canada said the challenges facing the economy were temporary.

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

The price of oil, one of Canada's major exports, fell on worries about a global economic slowdown. U.S. crude oil futures CLc1 settled 1.9 percent lower at $51.59 a barrel.

Still, oil has rebounded about 22 percent since slumping in December to an 18-month low.

“Oil is interesting; super volatile fourth quarter, nice rebound thus far this year. It is still the hot factor,” said Greg Anderson, global head of foreign exchange strategy in New York. “The CAD move (today) is almost tick for tick.”

The three-month correlation between the Canadian dollar and oil has climbed to about 90 percent, according to Refinitiv Eikon data, indicating the currency and the commodity move mostly in the same direction. For some months in 2018 the correlation was negative.

At 2:51 p.m. (1951 GMT), the Canadian dollar CAD=D4 was trading 0.2 percent lower at 1.3265 to the greenback, or 75.39 U.S. cents.

The currency, which on Wednesday touched its strongest intraday level in more than 5 weeks at 1.3180, traded in a range of 1.3183 to 1.3275.

For the week the loonie was up 0.8 percent. The Bank of Canada held interest rates steady as expected on Wednesday but said more rate increases would be necessary even though low oil prices and a weak housing market will harm the economy in the short term.

The U.S. dollar .DXY edged higher against a basket of major currencies despite recent cautious signals from the Federal Reserve about further rate hikes.

Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The 10-year CA10YT=RR rose 32 Canadian cents to yield 1.948 percent.

The gap between Canada’s 2- and 10-year yields narrowed by 1.2 basis points to a spread of 5.9 basis points.

Reporting by Fergal Smith; Editing by Jonathan Oatis and Meredith Mazzilli