Canadian dollar strengthens to a nearly four-week high as oil surges

TORONTO (Reuters) - The Canadian dollar strengthened to a nearly four week high against its U.S. counterpart on Wednesday as a surge in oil prices overshadowed the Bank of Canada’s decision to leave interest rates on hold.

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 cut its growth forecast, citing a looming slowdown in housing and a weaker outlook for exports, but said fiscal stimulus, accommodative monetary policy and a strengthening U.S. economy should help in months ahead.

As expected, it held its overnight rate at 0.5 percent, where it has been since July 2015.

“The broad contours are pretty much in line with what we were expecting,” said Jimmy Jean, senior economist at Desjardins.

U.S. crude CLc1 prices were up 3.18 percent at $51.89 a barrel, extending gains after data showed a large draw in U.S. crude stocks.

The inventory data was “bullish” for oil and the loonie benefited as oil climbed, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.

Oil is one of Canada’s major exports.

Gains for the loonie came as equity market volatility fell. The CBOE Volatility Index .VIX, which is a measure of expected volatility in U.S. stock prices, tumbled more than 6 percent.

At 10:59 a.m. EDT (1459 GMT), the Canadian dollar CAD=D4 was trading at C$1.3013 to the greenback, or 76.85 U.S. cents, much stronger than Tuesday's close of C$1.3119, or 76.23 U.S. cents.

The currency’s weakest level of the session was C$1.3129, while it touched its strongest since Sept. 22 at C$1.3012.

China reported its economy expanded at a steady 6.7 percent in the third quarter, as expected.

China is Canada’s second-largest trading partner.

Canadian government bond prices were lower across a steeper yield curve, with the two-year CA2YT=RR down 2.5 Canadian cents to yield 0.602 percent and the benchmark 10-year CA10YT=RR falling 22 Canadian cents to yield 1.218 percent.

The premier of the Belgian region that is the main impediment to a planned EU-Canada free trade agreement advised postponing a summit next week to sign the deal and taking a few more months to fix outstanding issues.

A Canadian government advisory group will this week recommend the creation of an infrastructure bank and urge increased immigration to stoke economic growth, the Globe and Mail reported.

Reporting by Fergal Smith; Editing by Will Dunham and Nick Zieminski