Canadian dollar firms as oil prices rise
* Currency up 0.3 percent versus greenback
* Key technical level of C$1.04 eyed
* Bond prices outperform U.S. market on short end
By John McCrank
TORONTO, Aug 27 (Reuters) - The Canadian dollar edged higher against the U.S. dollar on Wednesday, helped by firming oil prices as Tropical Storm Gustav looked as though it might strengthen as it heads toward key oil installations in the Gulf of Mexico.
Domestic bond prices rose on the short end, as traders bet the sell off in recent weeks had gone far enough, bringing yields back into line with interest rate expectations.
At 10:00 a.m. (1400 GMT), the Canadian dollar was at C$1.0458 to the U.S. dollar, or 95.62 U.S. cents, up from C$1.0484 to the U.S. dollar, or 95.38 U.S. cents, at Tuesday's close.
The C$1.04 level is seen as a key short-term support for the (U.S.) dollar-Canada currency pair.
"If C$1.04 yields, you've got room for a little bit more short-term Canadian dollar strength," said Shane Enright, currency strategist at CIBC World Markets.
He said if that were to happen, the follow through could push the Canadian dollar to around the C$1.0250 to C$1.03 to the U.S. dollar.
With no major data to key off of so far this week, the currency has taken its cue from higher oil prices.
The price of U.S. crude oil CLc1 climbed more than $3 to over $119 a barrel as weather forecasters predicted Tropical Storm Gustav would strengthen back into a hurricane and chart a course through the Gulf of Mexico, home to a quarter of U.S. oil production. See [ID:nN27421161]
The next piece of Canadian data is due Thursday, with the release of the balance of international payments for the second quarter. But the main report for the week comes Friday with the gross domestic product for the second quarter.
"While we think that growth will remain ever so slightly in the black, we wouldn't rule out a back-to-back negative print that would meet the definition of a technical recession," Derek Holt, economist at Scotia Capital, said in a note.
Analysts, on average, expect second-quarter GDP to come in at 0.7 percent, according to a Reuters poll. In the first quarter, the economy shrank by an annualized 0.3 percent.
The GDP figure is the last major piece of data before the Bank of Canada announces its interest rate decision on Sept.3.
BOND PRICES MIXED
Canadian bond prices outperformed the U.S. market on the short-end, as traders bet the sell off on the two-year bond in recent weeks had gone far enough .
The two-year bond yield most closely reflects the market's expectations of where it sees interest rates heading.
The market had been pricing in as much as two interest rate cuts by the Bank of Canada due to recent soft economic data, but those bets have been largely unwound.
"The market just got ahead of itself," said Michael Leavitt, fixed income strategist at MF Global Canada.
"These are more realistic levels that we're seeing."
Longer-dated bonds fell in price, following the larger U.S. market on the back of better-than-expected U.S. data.
The two-year bond rose 6 Canadian cents to C$99.89 to yield 2.800 percent. The 10-year was flat at C$105.80 to yield 3.540 percent.
The yield spread between the two-year and 10-year bond was 77.2 basis points, down from 79.5 at the previous close.
The 30-year bond fell 11 Canadian cents to C$116.76 for a yield of 4.012 percent. In the United States, the 30-year treasury yielded 4.426 percent.
The three-month when-issued T-bill yielded 2.49 percent, unchanged from the previous close. (Editing by Scott Anderson)
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