Canadian dollar weakens as yield advantage versus U.S. moderates

TORONTO (Reuters) - The Canadian dollar weakened on Tuesday against its U.S. counterpart, as Canada’s yield advantage moderated and the greenback gained broadly.

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 gap between Canada’s 5-year yield and its U.S. equivalent narrowed by 1.8 basis points to a spread of 3.1 basis points. Last week, the spread pushed above parity for the first time in nearly three years after the Bank of Canada raised interest rates for the second time in three months.

The Bank of Canada struck back on Monday against criticism it had not adequately prepared markets for last week’s rate hike after a prominent economist took issue with the central bank’s lack of communication in the nearly two months leading up to the move.

The U.S. dollar .DXY rose against a basket of major currencies as investors further unwound bearish bets against it following a bounce in Treasury yields and ahead of U.S. inflation data flagged as the next risk event for the market.

At 9:05 a.m. ET (1305 GMT), the Canadian dollar CAD=D4 was trading at C$1.2148 to the greenback, or 82.32 U.S. cents, down 0.3 percent.

The currency traded in a range of C$1.2083 to C$1.2156.

Still, the loonie has rallied more than 13 percent since early May. It touched its strongest in more than two years on Friday at C$1.2063.

Prices of oil, one of Canada’s major exports, rose as refinery restarts following Hurricane Harvey offset Hurricane Irma’s dampening effect on demand.

U.S. crude CLc1 prices were up 0.50 percent at $48.31 a barrel.

Canadian government bond prices were lower across the yield curve, with the two-year CA2YT=RR price down 0.5 Canadian cent to yield 1.551 percent and the 10-year CA10YT=RR falling 16 Canadian cents to yield 2.047 percent.

Canada’s new housing price index for July is due on Thursday and August home sales data is awaited on Friday.

Reporting by Fergal Smith; Editing by Meredith Mazzilli