C$ strengthens to a one-week high as oil breaches $50 a barrel

TORONTO (Reuters) - The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday as oil moved above $50 a barrel for the first time in nearly seven months.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

U.S. crude CLc1 prices were up 0.93 percent to $50.02 a barrel, helped by signs that a global supply glut that has plagued the market for nearly two years is easing. [O/R]

The loonie’s gains come one day after the Bank of Canada was less dovish than some investors had expected. The central bank kept interest rates on hold at 0.50 percent, saying the economy would shrink in the second quarter as a result of damage from recent wildfires in Alberta before rebounding later in the year.

Overnight index swaps reflected the market perception of almost no chance of a rate cut this year after having implied a 40 percent probability just two weeks ago when the wildfire cut oil production. BOCWATCH

At 9:29 a.m. EDT (1329 GMT), the Canadian dollar CAD=D4 was trading at C$1.2921 to the greenback, or 77.39 U.S. cents, stronger than Wednesday's close of C$1.3022, or 76.79 U.S.

The currency’s weakest level was C$1.3036, while it touched its strongest since May 18 at C$1.2912.

Domestic data for March was mixed.

Average weekly earnings of non-farm payroll employees rose 0.5 percent from the previous month and the number of non-farm payroll jobs increased by 25,300, data from Statistics Canada showed.

However, separate data from PayNet showed that borrowing activity by Canadian small businesses fell for the fourth month in a row, suggesting firms’ appetite for investment remained weak and boding poorly for economic growth.

Canadian government bond prices were higher across the maturity curve, with the two-year CA2YT=RR price up 1 Canadian cent to yield 0.636 percent and the benchmark 10-year CA10YT=RR rising 28 Canadian cents to yield 1.355 percent.

The Canada-U.S. two-year bond spread was 2.4 basis points less negative at -25.5 basis points, as Canadian government bonds underperformed at the front of the curve ahead of a 2-year auction in Canada.

The Bank of Canada will sell C$3.9 billion of 2-year bonds on behalf of the Government of Canada, expected to attract “decent demand” after recent cheapening at the front of the curve, according to a research note on Thursday from BMO Capital Markets.

Reporting by Fergal Smith Editing by W Simon