Canadian dollar rises with oil as investors weigh UK political risk

TORONTO (Reuters) - The Canadian dollar edged higher against its broadly stronger U.S. counterpart on Tuesday as oil prices rebounded, while political upheaval in the UK dominated trading in the foreign exchange market.

FILE PHOTO - A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

British lawmakers defeated Prime Minister Theresa May’s Brexit divorce deal by a crushing margin, raising the prospect of a disorderly exit from the European Union or even to a reversal of the 2016 decision to leave.

“This is potentially the most clear and present shock in the FX system right now,” said Bipan Rai, executive director and North America head, FX Strategy at CIBC Capital Markets. “If it’s risk-off, the loonie will get hit.”

Canada exports many commodities, including oil, so its economy could be hurt if political uncertainty reduces prospects for global growth.

U.S. crude oil futures CLc1 settled up 3.2 percent at $52.11 a barrel, supported by China's plan to introduce policies to stabilize a slowing economy.

At 3:17 p.m. (2017 GMT), the Canadian dollar CAD=D4 was trading 0.1 percent higher at 1.3272 to the greenback, or 75.35 U.S. cents. The currency, which on Monday touched its weakest level in nearly one week at 1.3297, traded in a range of 1.3227 to 1.3293.

The U.S. dollar .DXY rose against a basket of major currencies after data showing Germany's economy slowed in 2018 weighed on the euro.

Resales of Canadian homes fell 2.5 percent in December from the previous month, extending a string of monthly declines since September, the Canadian Real Estate Association said.

The Bank of Canada, which has hiked interest rates five times since July 2017, said last week that soft housing activity would weigh on the domestic economy as it left interest rates on hold.

Canadian inflation data for December is due on Friday, which could help guide market expectations for additional rate hikes from the central bank.

Canadian government bond prices edged lower across the yield curve, with the two-year CA2YT=RR down 2 Canadian cents to yield 1.896 percent and the 10-year CA10YT=RR falling 1 Canadian cent to yield 1.965 percent.

The gap between Canada’s two-year yield and its U.S. equivalent narrowed by 1.4 basis points to a spread of 63.5 basis points in favor of the U.S. bond.

Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney