Canadian dollar rallies to nearly 8-week high, gains pared as oil drops

TORONTO (Reuters) - The Canadian dollar rallied to a nearly eight-week high against a weaker U.S. counterpart on Thursday, although gains were pared as crude oil prices reversed lower.

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 currency CAD= has rallied 7 percent since Jan. 20, when it hit its weakest level since 2003 at C$1.4689, helped by expectations that the Bank of Canada will not cut rates in the near term.

A more dovish European Central Bank, the recovery in oil prices and stabilization in stocks have given the rally added traction, according to Michael Goshko, corporate risk manager at Western Union Business Solutions, while U.S. dollar weakness has taken over as the major driver over the past two days.

“It has nothing to do with what’s going on internally,” said Goshko.

The U.S. dollar .DXY extended its plunge against major currencies amid doubts the U.S. Federal Reserve will be able to hike interest rates this year.

The collapse through support at C$1.3800 was a gift for Canadian corporate U.S. dollar buyers, according to Goshko. “Our customers backed up the truck in record volumes,” he said.

Oil prices reversed earlier gains amid skepticism that a supply cut deal will be reached. U.S. crude CLc1 prices settled at $31.72 a barrel, down 1.73 percent.

The Canadian dollar CAD=D4 ended at C$1.3745 to the greenback, or 72.75 U.S. cents, stronger than Wednesday's official close of C$1.3773, or 72.61 U.S. cents.

The currency touched its strongest level since Dec. 11 at C$1.3640, while its weakest was C$1.3797.

However, market players expressed concern that weak domestic fundamentals will reassert as the dominant driver.

“I don’t think we’ve reached the inflection point,” said Mazen Issa, macro strategist at TD Securities. “I think it is just more of a breather, a washout of positioning.”

The Bank of Canada will be just as concerned with a significant appreciation in the Canadian dollar as it had been with a rapid move lower, he added.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR price half a Canadian cent higher to yield 0.395 percent and the benchmark 10-year CA10YT=RR off 3 Canadian cents to yield 1.157 percent.

The Canada-U.S. 10-year spread was 3.3 basis points less negative at -69.4 basis points, trading at its narrowest gap in two months, as Treasuries outperformed.

Canadian employment data for January and trade data for December are due on Friday ECONCA, as are U.S. jobs data.

Reporting by Fergal Smith; Editing by Meredith Mazzilli and Matthew Lewis