July 30, 2008 / 9:09 PM / in 9 years

Canadian dollar ekes out gain on oil surge

TORONTO (Reuters) - The Canadian dollar eked out a gain against the U.S. dollar on Wednesday, ending a six-session slide, as higher oil prices lent the commodity-based currency some support.

Canadian bond prices were mostly lower as solid North American stock market performances cut into the safe-haven attraction of government debt.

The Canadian dollar closed at C$1.0228 to the U.S. dollar, or 97.77 U.S. cents, up from C$1.0238 to the U.S. dollar, or 97.68 U.S. cents, at Tuesday's close.

The currency had fallen to low of C$1.0271 to the U.S. dollar during the session after the greenback strengthened on the back of some higher than expected private-sector jobs data.

But the Canadian dollar was given a boost after the price of U.S. crude oil jumped more than $4 a barrel on figures that showed a surprise drawdown in U.S. gasoline stocks.

Canada is the biggest supplier of oil to the United States and much of the Canadian dollar's 60 percent run-up between 2002 and late 2007 was linked to higher oil prices.

Moves in the Canadian dollar that are driven by fluctuations in the price of oil are still common, but the longer-term influence of oil has waned considerably since oil prices skyrocketed in recent months.

"Part of that has to do with the notion that the latest price action in the oil market is at least partly, if not largely, driven by speculation, and therefore not reflective of an underlying sustainable trend," said Matthew Strauss, senior currency strategist at BC Capital Markets.

"Consequently, the petro-currencies are not reacting to oil price moves as one might expect."

He said that if oil were to fall back to around the $100 a barrel mark, and if it was clearly fundamentals driving the price action, the relationship would likely strengthen again.

On the data front, reports showed that Canadian producer prices rose by 1.3 percent in June from May, while the price of raw materials increased by 4.4 percent from May. Neither report was a market mover.

Looking forward, the focus of the foreign exchange market will be on Canadian gross domestic product data for May, and U.S. GDP data for the second quarter, both on Thursday.

Friday will be an even bigger day for U.S. data, with a nonfarm payroll report, vehicle sales and an Institute of Supply Management report, all for July.

BOND PRICES MOSTLY LOWER

Canadian bond prices were mostly lower in light trade due to higher North American equities markets and the solid private-sector jobs report in the United States, which took the steam out of the recent safe-haven bid for government debt.

Thursday's GDP reports in both Canada and the United States have the potential to liven up the action in the bond market, said Levante Mady, fixed income strategist at MF Global Canada Co. in Vancouver.

"If we get a surprise on either front, we could see some rocking and rolling, but... I think the bigger market mover is going to be the employment report on Friday morning in the States."

The two-year bond fell 2 Canadian cents to C$101.21 to yield 3.063 percent. The 10-year bond dropped 33 Canadian cents to C$103.47 to yield 3.822 percent.

The yield spread between the two-year and 10-year bond was 75.3 basis points, up from 73.1 basis points.

The 30-year bond dropped 61 Canadian cents to C$113.84 for a yield of 4.170 percent. In the United States, the 30-year treasury yielded 4.648 percent.

The three-month when-issued T-bill yielded 2.46 percent, unchanged from the previous close.

Editing by Peter Galloway

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