C$ weakens to three-week low as Brexit shockwaves weigh

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a three-week low against its U.S. counterpart on Monday as Britain's vote to leave the European Union sent new shockwaves through financial markets, weighing on Canada's risk-sensitive currency.

Global stocks and oil prices fell as market participants absorbed the shock of Brexit. U.S. crude oil futures settled $1.31 lower at $46.33 a barrel. [O/R]

"More blood-letting in the market and as such the Canadian dollar is tracking the movement of oil and other risk-correlated assets," said Scott Smith, senior market analyst at Cambridge Global Payments.

Losses for the loonie came after it fell 1.7 percent on Friday, its largest drop in 17 months.

Canada's commodity-linked economy will suffer weaker growth because of Britain's vote to leave the EU, which has put the prospect of Canadian interest rate cuts back on the table.

Overnight index swaps implied a nearly one-third chance of a Bank of Canada rate cut this year after having been priced for no change in policy before Brexit.

The Canadian dollar ended at C$1.3073 to the greenback, or 76.49 U.S. cents, weaker than Friday's close of C$1.2999, or 76.93 U.S. cents.

The currency's strongest level of the session was C$1.2951, while it hit its weakest since June 2 at C$1.3120.

Smith expects the loonie to weaken further with risk-correlated assets in the near-term, targeting C$1.3300.

Speculators cut bullish bets on the loonie for the third straight week, Commodity Futures Trading Commission data showed on Friday. Net long Canadian dollar positions tumbled to 2,595 contracts in the week ended June 21 from 18,440 contracts in prior week.

Canadian government bond prices were higher across the maturity curve in sympathy with Treasuries as safe-haven assets rallied.

The two-year price rose 9.5 Canadian cents to yield 0.491 percent and the benchmark 10-year climbed 78 Canadian cents to yield 1.081 percent.

The Canada-U.S. 10-year spread shifted 4.1 basis points to -37.5 basis points, its smallest gap since May 3, as Treasuries outperformed.

(Reporting by Fergal Smith; Editing by Andrew Hay)