Canadian dollar weakens as oil rally loses momentum

The Canadian dollar weakened against its U.S. counterpart on Tuesday, giving back some of the previous day’s sharp gains, as oil prices fell and domestic data showed a surprise trade deficit.

The loonie was trading 0.3% lower at 1.2706 to the greenback, or 78.70 U.S. cents, after trading in a range of 1.2665 to 1.2721.

“Some of that weakness has been attributed to the pullback we’re seeing with crude prices,” said Edward Moya, senior market analyst at OANDA in New York. “The relentless rally with oil it seems to be showing some exhaustion.”

The price of oil, one of Canada’s major exports, fell as investors worried the resumption of indirect talks between the United States and Iran could revive an international nuclear agreement and allow more oil exports from the OPEC producer.

U.S. crude oil futures settled 2.2% lower at $89.36 a barrel, while the U.S. dollar advanced against a basket of major currencies. It was supported by the Federal Reserve’s recent hawkish tone.

“Markets are bracing for an aggressive Fed and that could be confirmed with the inflation report later this week.”

U.S. consumer price index data for January is due on Thursday.

On Monday, the loonie climbed 0.8%, its biggest gain in nearly four weeks.

Canada posted a trade deficit of C$137 mln in December, much different than the C$2.5 billion surplus that economists had expected, as imports hit a new record high and exports fell from November.

Canadian government bond yields were higher across much of the curve, with the 10-year up 1.6 basis points at 1.854%.

It fell 2.5 basis points further below its U.S. equivalent to a gap of 10.3 basis points in favor of the U.S. bond, the biggest gap since September last year.

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