Canadian dollar strengthens as oil rises, Wall Street pares losses

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday as oil prices rose and Wall Street pared some losses, spurred by weak Chinese trade data.

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 sharp decline in China’s exports revived concerns about the health of the world’s second-biggest economy.

Commodity currencies such as the Canadian dollar were sold on the weak Chinese data. But investors who got short the currency were forced to cover their positions as oil and U.S. stocks rebounded from session lows, said Patric Booth, head of trading at Velocity Trade.

The U.S. dollar .DXY tumbled from a seven-month high as Chinese concerns spooked a market that is expecting an interest rate increase from the Federal Reserve by the end of the year.

U.S. crude oil futures CLc1 settled up 26 cents at $50.44 a barrel after a U.S. government report showing hefty draws in diesel and gasoline offset the first crude inventory build in six weeks. [O/R]

Oil is one of Canada’s major exports.

Still, the Canadian dollar’s normally tight link with the price of oil, which broke down in September, likely will not reassert itself until after the U.S. election and a potential interest rate hike by the Federal Reserve, currency strategists said.

“The fact that crude has gone up above $50 and the Canadian dollar hasn’t really benefited one bit since the OPEC announcement ... to me leaves Canada (dollar) vulnerable if oil sells off,” Booth said.

The Canadian dollar CAD=D4 closed at C$1.3205 to the greenback, or 75.73 U.S. cents, stronger than Wednesday's close of C$1.3259, or 75.42 U.S. cents. Its close was just above the 200-day moving average at C$1.3196, according to Reuters data.

The currency’s strongest level of the session was C$1.3185, while it touched its weakest since Friday at C$1.3307, just shy of the more-than six-month low set on Friday at C$1.3315.

Canada’s government will watch the country’s housing market but has no imminent plans for further cooling measures, Finance Minister Bill Morneau said on Thursday, as fresh data showed prices were still on the rise.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR firmed 0.7 of a Canadian cent to yield 0.599 percent and the benchmark 10-year CA10YT=RR climbed 13 Canadian cents to yield 1.182 percent.

The 10-year spread versus Treasuries narrowed 1.7 basis points to -56.4 basis points as Treasuries outperformed on the pick-up in risk aversion.

Reporting by Fergal Smith; Editing by Nick Zieminski and David Gregorio