Rate convergence keeps Canadian dollar shackled to U.S. counterpart

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

TORONTO, July 27 (Reuters) - The Canadian dollar weakened against its broadly stronger U.S. counterpart on Thursday but the move was limited as investors bet on similar interest rate paths for the Bank of Canada and the Federal Reserve.

The dollar (.DXY) rose against a basket of major currencies after better-than-expected U.S. economic data and a dovish European Central Bank forced investors to reconsider the assumption that the Fed will pause interest-rate hikes.

"It's very hard for the CAD to get out from under the dollar's shadow at the moment," said Shaun Osborne, chief currency strategist at Scotiabank.

"The feeling is perhaps that the Fed and the Bank of Canada are on similar flight paths as far as interest rates go. Unless or until there is some sort of major break in that thinking in the market we probably will stay relatively rangebound."

Money markets are pricing in a peak interest rate of about 5.25% for the Bank of Canada over the coming months, not much less than the 5.42% terminal rate that is priced in for the Fed.

Canadian GDP data for May, due on Friday, could guide expectations for additional BoC rate hikes.

The Canadian dollar was trading 0.2% lower at 1.3227 to the greenback, or 75.60 U.S. cents, after moving in a range of 1.3159 to 1.3236. Other G10 currencies, with the exception of the yen, posted bigger declines.

"The Canadian dollar still looks cheap relative to where it should be," Osborne said, pointing to recent convergence of Canadian and U.S. yields, improved risk appetite and higher commodity prices.

The price of oil, one of Canada's major exports, settled 1.7% higher at $80.99 a barrel, after trading at its highest levels since April.

The Canadian 5-year yield touched its highest since December 2007 at 4.030% before dipping to 4.019%, up 13.9 basis points on the day.

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