TORONTO/OTTAWA: The Canadian dollar weakened against its US counterpart on Monday as crude oil slipped back below $40 a barrel and investors braced for policy decisions from the US Federal Reserve and other central banks.
Oil fell around 3 percent after Iran dashed hopes of a coordinated production freeze any time soon, returning bearish sentiment to the market over a supply glut that has sent prices crashing.
The Canadian dollar, which is highly sensitive to the price of oil, fell back from the four-month high it had touched on Friday.
Nonetheless, the currency did not weaken as much as might have been expected given the slump in crude, said Amo Sahota, director at Klarity FX in San Francisco.
"Just on how much oil has moved, we haven't seen a full correlation with the loonie itself," said Sahota. "It went along for the journey, then decided it's going to stop."
The Canadian dollar ended the North American trading session at C$1.3267 to the greenback, or 75.37 US cents, weaker than the Bank of Canada's official close on Friday of C$1.3231, or 75.58 US cents.
The currency's strongest level of the session was C$1.3213, while its weakest level was C$1.3279.
The Bank of Japan, the Fed, the Bank of England and the Swiss National Bank will all update their policies this week, after the European Central Bank last week cut interest rates, extended its asset-purchase program and pledged new cheap loans for banks.
The Canadian dollar, which has appreciated significantly since a Bank of Canada decision in January to hold rates steady rather than cut, could face pressure if the Fed reaffirms a hiking bias on Wednesday.
"Part of us feels like US dollar-Canadian dollar is due a decent rally," said Sahota. "If oil falters and the Fed remains relatively hawkish ... that might just give it enough excuse to try to squeeze US dollar-Canadian dollar higher."
The domestic economic calendar was light, with the main report showing a rise in Canadian home prices in February that was driven by the robust market in Vancouver.
Canadian government bond prices were higher across the maturity curve, with the two-year price up 2 Canadian cents to yield 0.583 percent and the benchmark 10-year rising 7 Canadian cents to yield 1.355 percent.
The Canada-US two-year bond spread was -37.7 basis points, while the 10-year spread was -61.1 basis points.
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