October 26, 2016 / 8:42 PM / in a year

CANADA FX DEBT-C$ weakens as oil falls, rate cut risk lingers

(Adds analyst quotes, details on housing agency and trade
talks; updates prices)
    * Canadian dollar ends at C$1.3382, or 74.73 U.S. cents
    * Bond prices lower across the yield curve
    * Canada-U.S. 10-year spread touches widest gap since March

    By Fergal Smith
    TORONTO, Oct 26 (Reuters) - The Canadian dollar weakened on
Wednesday against its U.S. counterpart, pressured by lower oil
prices and lingering risk that the Bank of Canada will cut
interest rates further.
    The loonie has been weakening since the Bank of Canada
acknowledged last week that it had considered cutting interest
rates at its policy meeting.
    On Monday, it touched its weakest against the greenback in
seven months at C$1.3398.
    "There is most definitely a potential for additional
monetary easing in Canada," said Brad Schruder, director of
corporate sales and structuring at BMO Capital Markets.
    The Canadian central bank's last rate cut came in July 2015,
when it trimmed by 25 basis points to leave its policy rate at
0.50 percent.
    "The decision by the federal government to impose new
restrictions essentially around mortgage finance has given the
Bank of Canada some breathing space that it did not have
before," Schruder added.
    Recent new measures for Canada's housing market have come
amid worries about a potential bubble.
    There is strong evidence that many of Canada's housing
markets are overvalued, the federal housing agency said on
Wednesday, but it tempered the warning with a forecast
projecting cooler housing starts, sales and prices in 2017 and
2018. 
    U.S. crude prices settled 78 cents lower at $49.18 a
barrel even after a surprise drawdown in U.S. crude inventories,
as traders remained cautious that OPEC would be able to cut
production come late November. 
    Oil is one of Canada's major exports.
    The Canadian dollar ended at C$1.3382 per U.S.
dollar, or 74.73 U.S. cents, weaker than Tuesday's close of
C$1.3352, or 74.90 U.S. cents.
    The currency's strongest level of the session was C$1.3314,
while its weakest was C$1.3385.
    Belgian politicians struggled to agree additions to a
planned EU-Canada free trade agreement and keep alive a deal
backed by all 27 other EU governments, but rejected by the
French-speaking south of Belgium. 
    The looming failure of free trade talks with the European
Union would derail Canada's push to reduce its economic
dependence on the United States. 
    Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasuries. The two-year 
fell 3 Canadian cents to yield 0.558 percent and the benchmark
10-year declined 14 Canadian cents to yield 1.154
percent.
    The 10-year yield narrowed 1.8 basis points further below
its U.S. equivalent to leave a spread of -63.7 basis points, its
widest gap since March, indicating underperformance for U.S.
Treasury debt.

 (Reporting by Fergal Smith, editing by G Crosse)

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