Canadian dollar weaker after Bank of Canada talks of its strength

TORONTO (Reuters) - The Canadian dollar weakened sharply against the U.S. currency on Monday as a Bank of Canada policymaker said the currency’s strength will be a factor in future rate decisions.

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

Bank of Canada Deputy Governor Timothy Lane said the central bank, which has hiked rates twice since July, will “be taking that (stronger Canadian dollar) into account pretty strongly in making our decisions” after a speech in Saskatoon, Saskatchewan.

Scotiabank strategists said Lane’s comments suggest “a cautious approach to additional rate increases” and perhaps make it more likely the bank holds rates steady at an October meeting. They expect the bank to raise rates again in December.

At 4 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2296 to the greenback, or 81.33 U.S. cents, down 0.9 percent. It has strengthened steadily since topping out near C$1.38 back in May.

The currency traded in a range of C$1.2173 to C$1.2338, its weakest level in almost two weeks.

“Maybe this has just given some people reason to draw down on some currency moves,” said Mark McCormick, North American head of FX strategy at TD Securities. “To me, this is the market looking for a reason to cut some exposure to the Canadian dollar.”

He recommended buying Canadian dollars on any push above C$1.23 and said he expects the pair to break C$1.20 in the next three to six months and get to C$1.15 by mid-2018.

The U.S. Federal Reserve is expected to announce the start of a plan to trim its $4.5-trillion portfolio of assets on Wednesday, with investors also looking for clues on whether U.S. interest rates could rise again by year-end.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 6 Canadian cents to yield 1.567 percent and the 10-year CA10YT=RR up 8 Canadian cents to yield 2.081 percent.

Earlier in the session, the 10-year yield touched its highest since October 2014 at 2.119 percent.

Foreign investors resumed their purchases of Canadian securities in July following a divestment in the previous month, led by a record acquisition of bonds, data from Statistics Canada showed.

Canada’s manufacturing sales and wholesale trade data for July are due on Tuesday and Thursday, respectively. The August inflation report and retail sales data for July are due on Friday.

Additional reporting by Fergal Smith; Editing by W Simon and Lisa Shumaker