Canadian dollar hits 7-week high on oil rally, Fed hike doubts

TORONTO (Reuters) - The Canadian dollar rallied to a seven-week high against a broadly weaker U.S. counterpart on Wednesday as oil prices bounced and doubts about future U.S. rate hikes weighed on the greenback.

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 Canada’s currency is colloquially known, may have also benefited from the announced takeover of a major Canadian retailer.

Wednesday’s rally completes a reversal of weakness since the start of 2016, which saw the loonie hit C$1.4689, its weakest level since April 2003. The recovery was set off by the Bank of Canada’s Jan. 20 decision to hold rates steady when many were bracing for a cut.

Meanwhile, doubts about the pace of U.S. rate hikes were stoked on Wednesday by a top U.S. Federal Reserve official’s acknowledgement that tighter financial conditions would weigh on policymakers heading into a March meeting.

The Canadian dollar CAD=D4 ended the session trading at C$1.3773 to the greenback, or 72.61 U.S. cents, much stronger than the Bank of Canada's official close of C$1.4027, or 71.29 U.S. cents.

The currency touched its strongest level since Dec. 16 at C$1.3757, while its weakest level was C$1.4103.

“For the most part it was a one-way street,” said David Bradley, director of foreign exchange trading at Scotiabank, citing the likely liquidation of bullish bets on the U.S. dollar against a string of currencies as technical levels broke down.

Oil prices jumped 8 percent higher, helped by the U.S. dollar weakness which made the commodity cheaper for holders of other currencies. Rising oil prices also typically support the currency of Canada, a major energy exporter. [O/R]

Scotia’s Bradley said the Canadian currency will likely trade closer to the lower end of a C$1.35 to C$1.45 range, with potential for more appreciation if U.S. jobs data due on Friday disappoints.

U.S. home improvement retailer Lowe's Companies Inc LOW.N said it agreed to buy Canada's Rona Inc RON.TO in a deal valued at C$3.2 billion ($2.28 billion).

Dealers doubted that foreign exchange flows related to the deal had driven the Canadian dollar higher overnight. But expectation that flows might occur was supportive of the currency.

“It could be market participants thinking that they might front run that (takeover related flows),” said Brad Schruder, director of foreign exchange at BMO Capital Markets.

Canadian government bond prices were lower across the maturity curve, with the two-year CA2YT=RR price down 5.5 Canadian cents to yield 0.401 percent and the benchmark 10-year CA10YT=RR falling 33 Canadian cents to yield 1.154 percent.

Additional reporting by Fergal Smith; Editing by Nick Zieminski and Tom Brown