December 1, 2016 / 9:47 PM / in a year

CANADA FX DEBT-C$ hits 3-week high as oil extends rally

* Canadian dollar settles at C$1.3317, or 75.09 U.S. cents
    * Loonie closes at strongest level since Nov. 8
    * Bond prices lower across a steeper yield curve
    * 10-year and 20-year yields touch highest in nearly 1 year

    By Alastair Sharp
    TORONTO, Dec 1 (Reuters) - The Canadian dollar hit a
three-week high against its U.S. counterpart and bond yields
rose on Thursday as oil extended a rally after major petroleum
producers agreed to cut output for the first time in eight
years.
    The Organization of the Petroleum Exporting Countries
reached the agreement on Wednesday after de-facto leader Saudi
Arabia accepted "a big hit" and dropped a demand that archrival
Iran also slash production. 
    The Canadian dollar settled at C$1.3317 to the
greenback, or 75.09 U.S. cents, stronger than Wednesday's close
of C$1.3429, or 74.47 U.S. cents and its strongest settlement
since Nov. 8.
    Prices for oil, a major Canadian export, jumped 4 percent,
adding to a more than 10 percent gain on Wednesday. 
    The loonie also gained after data on Wednesday showed that
the economy accelerated in the third quarter at its fastest pace
in more than two years as it benefited from a rebound in oil
exports, cementing expectations that the Bank of Canada will
keep interest rates steady next week. 
    Still, foreign exchange strategists forecast that the
Canadian dollar will extend recent losses against its U.S.
counterpart over the coming months as expected monetary policy
divergence with the United States overshadows higher oil prices,
a Reuters poll found. 
    "The policy divergence story is going to be a key one, given
our expectation for the Fed to continue normalizing in 2017 and
2018 as well as a cut from the Bank of Canada in the second half
of 2017 supports the view that dollar/Canada will move higher,"
said Ian Gordon, a foreign exchange strategist at Bank of
America Merrill Lynch.
    Canadian government bond prices were lower across a steeper
yield curve in sympathy with U.S. Treasuries as higher oil
prices raised inflation expectations.
    The two-year bond fell 9.5 Canadian cents to
yield 0.754 percent, and the benchmark 10-year 
declined 71 Canadian cents to yield 1.666 percent. 
    The 20-year bond price slumped C$1.87 to yield 2.244
percent. Both the 10-year and 20-year yields were at their
highest since December, 2015.
    Canada's employment report is due on Friday. The economy is
expected to have shed 20,000 jobs in November after two months
of strong gains. 

 (Additional reporting by Fergal Smith; Editing by W Simon and
Grant McCool)

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