C$ hits weakest since March as lower oil, rate divergence weigh

By Alastair Sharp

TORONTO (Reuters) - The commodity-linked Canadian dollar on Monday hit its weakest level against its U.S. counterpart since March, hurt by a slide in oil prices and the prospect that interest rates will rise faster in the United States than Canada.

Traders and strategists said the Canadian currency could face further selling pressure in the short term, especially if the U.S. Federal Reserve strikes a hawkish tone later this week.

"This market seems quite comfortable being long the U.S. (dollar), certainly against Canada," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"Oil's lower, equities are lower, interest rates are diverging between the U.S. and Canada, so from a number of different metrics the market is potentially poised to take the U.S. dollar higher against the Canadian dollar," he added.

The Canadian dollar settled at C$1.3220 to the greenback, or 75.64 U.S. cents, weaker than the Bank of Canada's official Friday close of C$1.3146, or 76.07 U.S. cents.

The price of oil, a major Canadian export, fell more than 2 percent, with U.S. crude hitting a three-month low, on rising concerns that a global glut of crude and refined products would pressure markets. [O/R]

"Fundamentals, sentiment, and technical factors favor" the U.S. dollar over the Canadian currency, Scotiabank strategists wrote in a note, adding they expect to see a "decisively neutral Bank of Canada and a tentatively, cautiously hawkish Fed".

The Fed's policy committee holds a two-day meeting on Tuesday and Wednesday this week, with a statement due at its conclusion.

Both the Scotiabank analysts and National's Spitz pointed to technical resistance around C$1.3315 for the currency's next test.

The currency's strongest level of the session was C$1.3125, while at one point it touched C$1.3243, its weakest since March 28.

The Canadian dollar also lost ground against the Japanese yen, British pound, euro, and Australian and New Zealand dollars.

Canada's economy should rebound "over the course of the year" from the impact of a wildfire in its energy heartland, Finance Minister Bill Morneau said on Saturday on the sidelines of a G20 meeting.

Canadian government bond prices were mostly lower across the maturity curve, although prices for 20-year and 30-year bonds rose. The two-year price slipped 3 Canadian cents to yield 0.578 percent and the benchmark 10-year lost 7 Canadian cents to yield 1.107 percent.

The Canada-U.S. two-year bond spread widened to -16.1 basis points, while the 10-year spread was -46.8 basis points.

(Editing by Jeffrey Hodgson)