C$ weakens with oil's retreat, fading risk appetite

TORONTO (Reuters) - The Canadian dollar lost ground against its U.S. counterpart on Tuesday as oil prices fell and risk appetite faded, while losses were more pronounced against the safe-haven Japanese yen.

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

Oil prices lost 4 percent after Saudi and Iranian oil ministers poured cold water on hopes for a coordinated move to limit production amid a global supply glut.

“We’ve seen hope fade in the energy market that there would be any near-term supply cuts to shore up the price,” said Scott Smith, senior market analyst at Cambridge Global Payments in Toronto. “That’s really been driving the bus for the Canadian dollar today.”

Weaker stock markets here and overseas were an additional headwind for the risk-sensitive commodity currency.

The Canadian dollar CAD=D4 ended the session trading at C$1.3768 to the greenback, or 72.63 U.S. cents, weaker than the Bank of Canada's official close of C$1.3712, or 72.93 U.S. cents.

The currency’s strongest level of the session was C$1.3696, while its weakest level was C$1.3821.

U.S. crude CLc1 prices settled down 4.6 percent at $31.87 a barrel, while Brent LCOc1 lost 3.8 percent to $33.38.

Cambridge’s Smith said the currency would likely fluctuate with oil in the short-term and could see further weakness in the next three to six months.

It weakened to 81.50 yen as the Japanese currency outperformed.

Canada’s Liberal government said on Monday it will stick to plans to invest in infrastructure projects even as it warned it would run much bigger budget deficits than previously anticipated.

Adding private sector investment to government infrastructure projects could spur even greater spending, reducing the odds of another Bank of Canada rate cut.

Canadian government bond prices were lower across the maturity curve. The two-year CA2YT=RR price fell 4.5 Canadian cents to yield 0.475 percent and the benchmark 10-year CA10YT=RR was down 13 Canadian cents to yield 1.138 percent.

Bank of Canada Deputy Governor Lawrence Schembri will deliver a speech on Wednesday, addressing the topic of elevated household debt and the risk to financial stability.

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