C$ rises to nearly four-month high on oil rally, BofC decision

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, marking a nearly four-month high as oil prices rallied and the Bank of Canada refrained from action to erode the currency’s recent sharp gains.

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 central bank held its policy interest rate steady at 0.50 percent, citing lower market volatility and stronger non-energy exports as it waits to assess the impact of government stimulus due to be unveiled in the March 22 budget.

“What the markets were anticipating was some push-back against Canadian dollar strength,” said Bipan Rai, executive director, macro strategy at CIBC Capital Markets.

Lack of push-back indicates the Bank of Canada is comfortable with the currency at present levels, he added.

It has rebounded 11 percent since hitting a 12-year low on Jan. 20 at C$1.4689.

Too sharp a rally could hinder a pick-up in exports that appears to be underway.

The implied probability of a rate cut this year dropped to less than 29 percent from 43 percent before the decision, according to the overnight interest rate futures market BOCWATCH. It was 80 percent a little over two weeks ago.

U.S. crude CLc1 prices settled at $38.29 a barrel, up 4.90 percent after a huge draw in U.S. gasoline inventories last week convinced the market that energy demand was improving. [O/R]

The Canadian dollar CAD=D4 ended at C$1.3250 to the greenback, or 75.47 U.S. cents, much stronger than Tuesday's close of C$1.3416, or 74.54 U.S.

The currency’s weakest level was C$1.3447, while it touched its strongest since Nov. 12 at C$1.3230.

The new Liberal government is expected to run a big deficit and invest in infrastructure projects. Adding private-sector investment to projects could spur even greater spending.

There should be a slight upgrade to the Bank of Canada’s economic projection in April if it incorporates what is expected from fiscal stimulus, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

Canadian government bond prices were lower across a steeper maturity curve. The two-year CA2YT=RR price fell 7.5 Canadian cents to yield 0.532 percent and the benchmark 10-year CA10YT=RR was down 61 Canadian cents to yield 1.248 percent.

The Canada-U.S. two-year bond spread was 1.8 basis points higher at -36.6 basis points, while the 10-year spread was 2.4 basis points higher at -62.8 basis points as Canadian government bonds underperformed.

Reporting by Fergal Smith; Editing by James Dalgleish