May 14, 2008 / 12:23 PM / 10 years ago

Canadian dollar rallies on lofty oil prices

TORONTO (Reuters) - The Canadian dollar rose back above parity versus the U.S. dollar on Wednesday for the second straight day as near-record oil prices allowed the currency to rekindle its link with commodity prices.

Domestic bond prices were lower across the curve due mainly to a Bank of England quarterly inflation report that left little room for interest rate cuts.

At 8:10 a.m. (1210 GMT), the Canadian dollar was at US$1.0025, valuing a U.S. dollar at 99.75 Canadian cents, up from C$1.0028 to the U.S. dollar, or 99.72 U.S. cents, at Tuesday’s close.

The recent strength in the Canadian dollar was due in large part to oil prices that stuck close to a record high of nearly $127 a barrel during the previous session.

Canada is a major oil producer and exporter and it often follows moves in the commodity, though its link has been less intense this year than in 2007.

“I attribute most of the loonie’s gains to near record high oil prices,” said Sal Guatieri, senior economist at BMO Capital Markets. “It looks like the currency has reestablished its normally tight link with crude oil prices.”

Guatieri said lofty oil, natural gas and grain prices are helping to expand Canada’s trade surplus and offer support to the Canadian dollar. That is a change from earlier this year when Canada’s trade balance narrowed and weighed on the currency.

With no Canadian data due on Wednesday the Canadian dollar will likely be dictated by events in the United States, mostly the U.S. consumer price index report for April which could offer more insight into whether the U.S. Federal Reserve will halt its aggressive string of interest rate cuts.

BONDS FALL

Canadian bond prices were down across the curve as the Bank of England said inflation would shoot up this year and stay above its target in two years if interest rates fell, which left little room for rate cuts to boost a slowing economy.

“The Bank of England’s quarterly inflation report was interpreted as a little more hawkish than expected as the bank underscored inflation risks,” said Guatieri.

“The market is interpreting it to mean that the Bank of England will not cut interest rates anytime soon although the door is sill open for a rate cut later in the year.”

The two-year bond fell 11 Canadian cents to C$101.76 to yield 2.857 percent. The 10-year slid 15 Canadian cents to C$102.88 to yield 3.623 percent.

The yield spread between the two- and 10-year bonds was 76.6 basis points, down from 80.1 at the previous close.

The 30-year bond dipped 15 Canadian cents to C$115.57 for a yield of 4.079 percent. In the United States, the 30-year treasury yielded 4.654 percent.

The three-month when-issued T-bill yielded 2.70 percent, up from 2.69 percent at the previous close.

Reporting by Frank Pingue; Editing by Scott Anderson

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