Loonie weakens along with oil prices, ahead of BoC rate decision

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto
By Fergal Smith

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against the greenback on Tuesday as oil prices fell and domestic data showed factory sales dropping for the third straight month, with the decline for the loonie coming one day before a Bank of Canada interest rate decision.

At 2:57 p.m. (1957 GMT), the Canadian dollar <CAD=D4> was trading 0.1% lower at 1.3072 to the greenback, or 76.50 U.S. cents. The currency traded in a range of 1.3045 to 1.3077.

"It's purely because oil markets are on the back foot," said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.

U.S. crude oil futures <CLc1> settled 0.3% lower at $58.34 a barrel on expectations that a well-supplied global market would be able to absorb disruptions that have cut Libya's crude production to a trickle. Oil is one of Canada's major exports.

Canadian factory sales decreased by 0.6% in November from October, affected by rail transportation disruptions. That was a bigger drop than the 0.3% decline that analysts had forecast, although there was an upward revision to the prior month.

"Transitory factors aside, the second half of 2019 wasn't kind to Canadian manufacturers," Josh Nye, a senior economist at RBC Economics, said in a note.

The manufacturing data could support a view that Canada's economic growth slowed in the fourth quarter.

The Bank of Canada is due to update its outlook for the economy on Wednesday, when it is expected to leave its benchmark interest rate on hold at 1.75%. <BOCWATCH>

Earlier this month, Bank of Canada Governor Stephen Poloz said there was still plenty of uncertainty about what a Phase 1 trade deal between the United States and China could mean for Canadian exports. Canada sends about 75% of its exports to the United States.

"The key takeaway tomorrow is how Poloz is viewing the Phase 1 deal and what kind of implications that holds for policy," Harvey said.

The Canadian government will unveil legislation to ratify the United States-Mexico-Canada trade deal on Jan. 29, Prime Minister Justin Trudeau said on Tuesday.

Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The two-year <CA2YT=RR> rose 6 Canadian cents to yield 1.620% and the 10-year <CA10YT=RR> was up 51 Canadian cents to yield 1.509%.

The 10-year yield touched its lowest intraday level since Dec. 4 at 1.497%.

(Reporting by Fergal Smith; Editing by Bernadette Baum and Peter Cooney)