Canadian dollar rebounds from 10-day low as oil rallies

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

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as oil prices rose and investors awaited an interest rate decision by the Bank of Canada, with the currency recouping much of the previous day’s decline.

Canada’s central bank is due to make an interest rate decision and update its economic outlook on Wednesday. The central bank has said it will leave rates at a record low of 0.25% until its 2% inflation target is achieved sustainably, which it does not expect for at least two years.

With the Bank of Canada on the sidelines, the Canadian dollar’s prospects “increasingly lie with broader risk sentiment,” said Tony Valente, a senior FX dealer at AscendantFX.

The one-month rolling correlation between the loonie and the benchmark S&P 500 has climbed to 0.8 from 0.3 in early October, Refinitiv Eikon data showed, indicating the currency and the stock market are moving largely in the same direction.

Wall Street's main indexes steadied on Tuesday following the S&P 500's worst day in a month, while U.S. crude oil futures CLc1 settled 2.6% higher at $39.57 a barrel as companies shut down some U.S. Gulf of Mexico oil production ahead of an approaching storm.

Oil is one of Canada’s major exports. The move higher in crude prices helped the loonie “to catch a bid,” Valente said.

The Canadian dollar CAD= was trading 0.4% higher at 1.3159 to the greenback, or 75.99 U.S. cents, having traded in a range of 1.3142 to 1.3212.

On Monday, the currency hit a 10-day low at 1.3225 as surging coronavirus cases and doubts about a U.S. coronavirus relief package weighed on investor sentiment.

Canadian government bond yields were lower across much of a flatter curve in sympathy with U.S. Treasuries on Tuesday. The 10-year CA10YT=RR fell 2.2 basis points to 0.606%.

Reporting by Fergal Smith; Editing by Nick Zieminski and Jonathan Oatis