Canadian dollar strengthens to nearly two-week high as Brexit odds fall

TORONTO (Reuters) - The Canadian dollar strengthened to a nearly two-week high against its U.S. counterpart on Thursday as increased chances that Britain will stay in the European Union and higher oil prices supported the risk-sensitive commodity-linked currency.

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

A series of late opinion polls favored Britons voting in Thursday’s referendum to stay in the European Union and bookmakers’ odds indicated a further shift toward the “Remain” camp.

Optimism over Britain remaining in the EU helped drive up stocks and oil prices. U.S. crude CLc1 prices were up 1.32 percent to $49.78 a barrel.

The loonie would weaken and the chances that the Canadian central bank cuts interest rates would jump if Britain votes to leave the European Union, strategists warn, noting the result could hit global growth and spell bad news for commodity-exporting countries.

At 9:06 a.m. EDT, the Canadian dollar CAD=D4 was trading at C$1.2737 to the greenback, or 78.51 U.S. cents, stronger than Wednesday's close of C$1.2839, or 77.89 U.S. cents.

The currency’s weakest level of the session was C$1.2843, while it touched its strongest since June 10 at C$1.2680.

Gains for the loonie came after domestic data on Wednesday showed retail sales rebounded in April to reach a record C$44.28 billion.

Still, the Bank of Canada has signaled that the economy may contract in the second quarter after a solid start to the year as a huge wildfire in Alberta weighs on oil production.

Canadian government bond prices were lower across the maturity curve, in sympathy with U.S. Treasuries, as increased risk appetite reduced investor demand for safe-haven assets.

The two-year CA2YT=RR price fell 7 Canadian cents to yield 0.635 percent and the benchmark 10-year CA10YT=RR dropped 78 Canadian cents to yield 1.315 percent. The 10-year yield touched its highest since June 1 at 1.319 percent.

The curve steepened as the spread between the 2-year and 10-year yields widened by 4.3 basis points to 68 basis points, its most in two weeks, indicating underperformance for longer-dated maturities.

Reporting by Fergal Smith; Editing by Nick Zieminski