C$ weakens as oil prices retreat

TORONTO (Reuters) - The Canadian dollar weakened slightly against its U.S. counterpart on Thursday as oil prices fell, although some losses were pared after tamer-than-expected U.S. inflation data.

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

Oil markets closed lower on a mixed report from the International Energy Agency and skepticism that an upcoming meeting of major producers would do much to tighten the supply demand balance.

“The correlation between the Canadian dollar and oil is currently pretty high,” said Hendrix Vachon, senior economist at Desjardins.

U.S. crude CLc1 prices settled at $41.50 a barrel, down 0.62 percent.

U.S. consumer prices rose less than expected in March and underlying inflation slowed, suggesting the Federal Reserve will remain cautious about raising interest rates this year.

However, the prospects of U.S. interest rate hikes were already low, said Vachon, so the data was “not a game changer.”

The loonie hit a nearly nine-month high at C$1.2744 on Wednesday but closed lower on the day after the Bank of Canada counseled caution on the outlook for economic growth.

The central bank warned that the country’s improving economy faced downside risks, including a stronger currency that could drag on non-commodity exports, although it held interest rates steady and raised growth forecasts.

Still, the implied probability of a Bank of Canada rate cut this year has been reduced to near zero from more than 50 percent at the start of March. BOCWATCH

The Canadian dollar CAD=D4 ended at C$1.2849 to the greenback, or 77.83 U.S. cents, weaker than Wednesday's close of C$1.2815, or 78.03 U.S. cents.

The currency’s strongest level of the session was C$1.2782, while its weakest was C$1.2897.

The loonie has rebounded more than 14 percent since hitting a 12-year low of C$1.4689 in January.

New home prices in Canada rose by 0.2 percent in February from January, pushed up by continuing strength in the major regions of Toronto and Vancouver, Statistics Canada said.

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR price down 4.5 Canadian cents to yield 0.596 percent and the benchmark 10-year CA10YT=RR falling 42 Canadian cents to yield 1.296 percent.

The spread between the 2-year and 10-year yields widened by 2.4 basis points to 70.0 basis points, indicating underperformance for longer-dated maturities.

Reporting by Fergal Smith; Editing by Andrew Hay