December 12, 2016 / 9:37 PM / 4 years ago

CANADA FX DEBT-C$ posts fresh 7-week high as oil climbs

(Adds analyst quotes, updates prices to close)
    * Canadian dollar ends at C$1.3134, or 76.14 U.S. cents
    * Loonie touches strongest since Oct. 19 at C$1.3110
    * Bond prices lower across a steeper yield curve
    * 10-year yield touches highest since July 2015

    By Fergal Smith
    TORONTO, Dec 12 (Reuters) - The Canadian dollar strengthened
to a fresh seven-week high against its U.S. counterpart on
Monday as oil surged and investors weighed what message will
accompany an expected interest rate hike this week from the
Federal Reserve.
    The loonie has rebounded more than three percent from an
eight-month low of C$1.3589 in mid-November. A more uncertain
trade environment for Canada since the U.S. election and raised
investor expectations for Fed rate increases have been offset by
higher prices for oil, one of Canada's major exports.
    "It's all about oil prices," said Shaun Osborne, chief
currency strategist at Scotiabank.
    U.S. crude oil futures settled $1.33 higher at $52.83
a barrel after the Organization of the Petroleum Exporting
Countries and some of its rivals reached their first deal since
2001 to jointly reduce output to tackle global oversupply. 
    The U.S. dollar fell against a basket of major
currencies on concerns that the Fed could suggest that the
greenback's recent gains had gone too far. 
    "The risk for the U.S. dollar is that oil prices continue to
push on and perhaps we get a dovish hike message from the Fed
... as they hike rates now and move to the sidelines until they
get some clarity on what kind of policies we are going to get
from the (Donald Trump) administration," Osborne said.
    The Canadian dollar ended at C$1.3134 to the
greenback, or 76.14 U.S. cents, stronger than Friday's close of
C$1.3180, or 75.87 U.S. cents.
    The currency's weakest level of the session was C$1.3168,
while it touched its strongest since Oct. 19 at C$1.3110.
    Recent gains for the loonie have come despite the Bank of
Canada pointing last week to "significant" slack in the Canadian
economy as it held interest rates steady. 
    The central bank's decision to leave rates unchanged set the
stage for a divergence in policy from that of the Fed.
    Strategists expect yields on Canada's bonds to fall further
below those of their U.S. counterparts, softening the blow of
expected Fed rate increases on already stretched Canadian
    Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasuries as higher oil prices
supported investors' expectations for increased inflation.
    The two-year price fell 3.5 Canadian cents to
yield 0.760 percent and the benchmark 10-year 
declined 21 Canadian cents to yield 1.752 percent.
    The 10-year yield touched its highest intraday level since
July 2015 at 1.781 percent.

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
Grant McCool)
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