August 21, 2008 / 8:57 PM / 9 years ago

Canadian dollar posts big gain as oil prices rally

* Canadian dollar touches highest level in two weeks

* Canada inflation rises, but on low side of expectations

* Bond prices hampered by slide in U.S. Treasuries

By Frank Pingue

TORONTO, Aug 21 (Reuters) - The Canadian dollar rose well over 1 cent versus the U.S. dollar on Thursday as the price of oil surged and inflation data did not suggest a Bank of Canada interest rate cut on the horizon.

Canadian bond prices closed lower across the curve as the slide in the bigger U.S. Treasury market influenced direction north of the border, while the inflation data was pushed aside.

The Canadian dollar closed at C$1.0440 to the U.S. dollar, or 95.79 U.S. cents, up from C$1.0612 to the U.S. dollar, or 94.23 U.S. cents, at Wednesday’s close.

During the session, the currency rose as high as C$1.0436 to the U.S. dollar, or 95.82 U.S. cents, its highest level in two weeks and largest gain since April.

A surge in oil prices was credited for the bulk of the Canadian dollar’s 1.7 percent rise versus the greenback since Canada is the largest exporter of oil to the United States.

Other factors explaining the Canadian dollar’s rally were a weakening U.S. dollar due to nagging concerns about the health of the U.S. financial services sector and, to a lesser extent, data that showed Canada’s inflation rate moved to a five-year high.

“Oil went up, the U.S. dollar went down and the Canadian dollar went along for a very nice ride,” said David Watt, senior currency strategist at RBC Capital Markets.

Watt said there was a risk early in the session that the inflation data would be weak and accommodate thoughts that the Bank of Canada might cut interest rates.

But that thinking did not gain momentum and the Canadian currency extended a steady climb versus its U.S. counterpart that started midway through Wednesday’s session.

Canada’s annual inflation rate rose to 3.4 percent in July from 3.1 percent in June, while the core rate, closely watched by the Bank of Canada, stayed well within the bank’s target at 1.5 percent for the fourth straight month.

BOND PRICES SLIDE

Canadian bond prices were little changed after the Canadian inflation figures were released, but then trickled lower as the session wore on when a slide in the influential U.S. Treasury market influenced trade.

Some experts even figured bond yields could have fallen since the inflation data showed the core rate did not rise by much, while the headline number did not go up as much as some had thought.

“I wouldn’t necessarily have expected a rally (in bond yields) based on the events of today which seems to be general financial market pessimism and somewhat soft inflation numbers beneath the surface,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

“I am a little surprised that we are getting a selloff, but the fact that the U.S. sold off is probably contributing to the Canadian price action.”

U.S. Treasuries were dragged down by expectations that a bailout of U.S. mortgage agencies Fannie Mae and Freddie Mac will keep the firms solvent and allow them to make good on outstanding debt.

The two-year bond dropped 8 Canadian cents to C$99.77 to yield 2.860 percent. The 10-year bond fell 17 Canadian cents to C$105.33 to yield 3.597 percent.

The yield spread between the two-year and 10-year bond was 71.2 basis points, down from 77.8 at the previous close.

The 30-year bond slipped 4 Canadian cents to C$116.21 for a yield of 4.041 percent. In the United States, the 30-year treasury yielded 4.464 percent.

The three-month when-issued T-bill yielded 2.49 percent, down from 2.52 percent at the previous close. (Editing by Peter Galloway)

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