June 17, 2016 / 9:12 PM / a year ago

C$ strengthens as oil prices rebound, Brexit fears abate

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

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday as a selloff in oil and stocks ahead of Britain's EU membership vote next week abated, although gains for the loonie were limited by domestic data that showed slowing inflation.

The currency lost 0.9 percent of its value against the greenback over the course of the week, with much of the weakness attributed to worries that Britain will leave the bloc, which would send a shockwave through global financial markets.

"The Canadian dollar's not immune to the global impact of Brexit, certainly we'll get caught up in some of the volatility," said Blake Jespersen, managing director of foreign exchange sales at BMO Capital Markets.

"I think it's going to be a very close vote and it's really too close to call at this point," he said.

The British pound and bond yields rose on Friday as the murder of a pro-EU British lawmaker a day earlier was seen potentially tipping the scales back in favor of a vote to remain.

The Canadian dollar CAD=D4 settled at C$1.2878 to the greenback, or 77.65 U.S. cents, stronger than Thursday's close of C$1.2961, or 77.15 U.S. cents.

Oil prices jumped 4 percent, which Jespersen said was likely also driven by a change in sentiment on the Brexit risk.

"I don't think any one asset class is going to break away on fundamentals until we get through this vote," he said.

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR price down 1.5 Canadian cent to yield 0.520 percent and the benchmark 10-year CA10YT=RR falling 13 Canadian cents to yield 1.121 percent.

Canada's annual inflation slowed to 1.5 percent in May from 1.7 percent in April, Statistics Canada said. The annual core inflation rate was 2.1 percent, down from 2.2 percent in April.

Still, core inflation remained above the Bank of Canada's target of 2 percent, suggesting the central bank should not be cutting interest rates, said Richard Gilhooly, head of rates strategy at CIBC Capital Markets.

"We think that's their inclination anyway because they don't want to be getting into the negative rates scenario," Gilhooly said.

Speculators cut bullish bets on the loonie for the second straight week, Commodity Futures Trading Commission data showed on Friday. Net long Canadian dollar positions fell to 18,440 contracts in the week ended June 14 from 21,537 contracts in the prior week.

Additional reporting by Fergal Smith; Editing by Bernadette Baum and Leslie Adler

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