July 12, 2016 / 1:17 PM / in a year

C$ stronger as oil rises, attention turns to Bank of Canada

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday, helped by higher oil prices and improved global risk sentiment as political tensions eased in Britain, Japan prepared more stimulus, and U.S. stocks hit record highs.

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

The gains more than reversed Monday’s weakness in the loonie, as Canada’s currency is colloquially known.

“It’s based on an overall pickup in risk appetite,” said Scott Smith, senior market analyst at Cambridge Global Payments in Toronto. “That has helped levitate equities, risk-correlated assets, oil is up over 4 percent on the day, so that has been one of the main drivers for the loonie.”

The Canadian dollar settled at C$1.3030 to the greenback, or 76.75 U.S. cents, much stronger than the Bank of Canada’s official Monday close of C$1.3121, or 76.21 U.S. cents.

The currency’s strongest level of the session was C$1.2982, while its weakest level was C$1.3131.

Oil surged 5 percent, its biggest daily gain since April, although some of that was attributed to investors covering short positions as worries about a supply glut persisted. [O/R]

The Bank of Canada is likely to sound a dovish tone but hold rates steady when it presents its quarterly monetary policy report on Wednesday, pointing to global uncertainties like Brexit and indebted consumers at home as economic risks.

Canadian government bond prices were lower across the maturity curve, with the two-year price down 6.5 Canadian cents to yield 0.505 percent and the benchmark 10-year slumping 72 Canadian cents to yield 1.057 percent.

That was the 10-year’s highest yield this month.

The Canada-U.S. two-year bond spread was -18.4 basis points, while the 10-year spread was -44.8 basis points.

The loonie was also stronger against the yen, which fell broadly as a weekend election victory by Japan’s ruling coalition paved the way for more stimulus.

It also gained versus the euro and Swiss franc, but underperformed sterling and the Australian and New Zealand dollars.

Reporting by Alastair Sharp; Editing by Nick Zieminski and James Dalgleish

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