Canadian dollar nears eight-month high after surprise swing to trade surplus

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

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, approaching a near eight-month high notched last week, as oil prices rose and as domestic data showed a surprise swing in the trade balance to a surplus in May.

Rising exports of motor vehicles, aircraft and energy products helped Canada post a C$762 million trade surplus in goods in May, Statistics Canada reported. Analysts had forecast a shortfall of C$1.50 billion, while April’s deficit was revised slightly wider to C$1.08 billion.

The price of oil, one of Canada's major exports, rebounded after a steep fall in the previous session as OPEC and its allies' decision to extend output cuts was not enough to counter investors' concerns about the slowing global economy. U.S. crude oil futures CLc1 were up 1.3% at $56.99 a barrel.

At 9:14 a.m. (1314 GMT), the Canadian dollar CAD=D4 was trading 0.3% higher at 1.3066 to the greenback, or 76.53 U.S. cents. The currency, which touched on Friday a near eight-month high at 1.3060, traded in a range of 1.3066 to 1.3119.

The loonie has benefited in recent weeks from data showing a recovery in the domestic economy, which could keep the Bank of Canada on hold over the coming months even if the Federal Reserve cuts interest rates as the market expects. Money markets see about a 30% chance of a Bank of Canada interest rate cut this year. BOCWATCH

Clues to the direction of Canadian interest rates come from Canada’s jobs report for June, which is due on Friday.

Canadian government bond prices dipped across a flatter yield curve, with the two-year CA2YT=RR down 3 Canadian cents to yield 1.498% and the 10-year CA10YT=RR falling 5 Canadian cents to yield 1.472%.

The gap between Canada’s 2- and 10-year yields narrowed by 1.1 basis points to a spread of 2.6 basis points, its narrowest gap since August 2007.

Meanwhile, the gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 1.7 basis points to a spread of 26.6 basis points in favor of the U.S. bond, its narrowest gap since February last year.

Reporting by Fergal Smith; Editing by David Gregorio