Canadian dollar gains with oil price jump, dovish Fed minutes

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil prices jumped 5 percent and minutes from the most recent U.S. Federal Reserve meeting confirmed a dovish tone.

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 loonie, as the Canadian currency is colloquially known, had rallied sharply since mid-January but has mostly traded in a tight C$1.30-C$1.32 range so far this month.

“We’re consolidating for now, we think that’s the right play for dollar/Canada,” said Bipan Rai, director of foreign exchange strategy at CIBC Capital Markets.

Fed policymakers last month debated an April interest rate hike, though a consensus emerged that risks from a global economic slowdown warranted a cautious approach, the minutes showed.

The Canadian dollar CAD=D4 settled at C$1.3094 to the greenback, or 76.37 U.S. cents, stronger than Tuesday's close of C$1.3157, or 76.01 U.S. cents.

Rai said the direction of the loonie is largely dependant on the Fed’s next moves, which CIBC expects could include two rate hikes this year, a more aggressive path than the broader market is anticipating.

“The market, in our view, is mispricing the Fed,” he said.

Meanwhile prices for oil, a major Canadian export, surged by the most in three weeks after the U.S. government reported a surprise draw in domestic crude stockpiles.

CIBC’s Rai said the Canadian currency could also get a boost next week if the federal government’s stimulative budget from March prompts the Bank of Canada to shorten the time before it expects to hit its inflation target.

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR price falling 5 Canadian cents to yield 0.545 percent and the benchmark 10-year CA10YT=RR down 40 Canadian cents to yield 1.211 percent.

The 10-year yield touched on Tuesday its lowest in five weeks at 1.157 percent.

The pace of purchasing activity in Canada slowed again in March as measures of inventories and supplier deliveries contracted further, the Ivey Purchasing Managers Index showed.

Additional reporting by Fergal Smith; Editing by Meredith Mazzilli and Diane Craft