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Canadian dollar slips on risk Bank of Canada depresses rate hike bets

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·2 min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto
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By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Monday, as oil gave back its earlier gains and investors weighed the potential for the Bank of Canada to push back against recent moves by the market to price in multiple rate hikes next year.

The loonie was trading 0.2% lower at 1.2386 to the U.S. dollar, or 80.74 U.S. cents, after trading in a range of 1.2339 to 1.2399. Last Thursday, the currency touched its strongest level in nearly four months at 1.2287.

"Price signals are warning that the CAD's rally is perhaps stalling and might reverse modestly," strategists at Scotiabank, including Shaun Osborne, said in a note. "The obvious trigger for that move looms large in the Bank's policy decision."

Bank of Canada Governor Tiff Macklem "may want to hold off on rate-hike signaling and depress aggressive market-pricing for BoC tightening that has supported the CAD of late," the strategists added.

The central bank is due to make an interest rate announcement on Wednesday. It is expected to raise its inflation forecast and to largely end stimulus from its pandemic-era bond buying program, starting a countdown of sorts to the first interest rate hike since October 2018.

Money markets see four hikes next year.

Speculators have cut bearish bets on the currency to the lowest in five weeks, data showed on Friday.

The price of oil, one of Canada's major exports, touched a seven-year high before settling unchanged at $83.76 a barrel.

"We are seeing some signs of tightness easing in the physical oil market," said Erik Bregar, an independent FX analyst.

That's helped cap recent gains for oil and the Canadian dollar, Bregar added.

Canadian government bond yields were little changed across the curve, with the 10-year up less than half a basis point at 1.652%.

(Reporting by Fergal Smith; Editing by Jane Merriman and Jonathan Oatis)

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