TORONTO (Reuters) - The Canadian dollar strengthened to a nearly five-month high against its U.S. counterpart on Thursday, as higher domestic yields pressured investors that had bet against the currency and oil prices rose.
Gains for the loonie came after it scored on Wednesday, posting its biggest advance in three months as hawkish comments from Bank of Canada Governor Stephen Poloz helped push Canadian bond yields upward.
Higher yields tend to increase the return from owning a currency.
Given the "sizable" move higher in yields we are starting to see an unwind of short positions in the Canadian dollar, said Scott Lampard, head of global markets at HSBC Bank Canada.
Data from the U.S. Commodity Futures Trading Commission and Reuters calculations last week showed that bearish bets on the Canadian dollar had been reduced from record levels in May, but remained at elevated levels.
Chances of a Bank of Canada rate hike next month have increased to 44 percent from just 20 percent after subdued inflation data on Friday, data from the overnight index swaps market shows BOCWATCH.
Prices of oil, one of Canada's major exports, rose for a sixth straight session after a decline in weekly U.S. production eased concerns about deepening oversupply.
U.S. crude CLc1 prices settled 19 cents higher at $44.93 a barrel.
At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3005 to the greenback, or 76.89 U.S. cents, up 0.3 percent.
The currency's weakest level of the session was C$1.3044, while it touched its strongest since Feb. 2 at C$1.2986.
"It isn't just a Canadian dollar story," it's a broader shift away from the greenback, Lampard said.
The U.S. dollar fell against a basket of major currencies .DXY on growing expectations of more hawkish monetary policies in Europe as well as Canada and on skepticism of another Federal Reserve interest rate increase this year.
Canadian government bond prices were lower across a steeper yield curve in sympathy with U.S. Treasuries and German Bunds.
The 10-year CA10YT=RR declined 73 Canadian cents to yield 1.707 percent. The 10-year yield touched its highest intraday since March 21 at 1.715 percent, while the gap between it and its U.S. equivalent narrowed by 3.8 basis points to a spread of -56.1 basis points, its narrowest since Oct. 19, as Canadian government bonds underperformed.
Canada's gross domestic product data for April and the Bank of Canada's business outlook report are due on Friday ECONCA.
Reporting by Fergal Smith, editing by G Crosse