Loonie rides oil price rally, bonds firm

Thursday, February 24th, 2011 | Finance News

TORONTO (Reuters) – Canada's dollar climbed against the U.S. currency on Thursday morning, approaching three year highs reached last week, as oil prices extended gains on turmoil in Libya.

Oil surged again on Thursday on concern unrest in Libya could spread to other major oil producers in the Middle East, including Saudi Arabia. Both Brent and U.S. crude futures jumped to multiyear highs, providing some support to Canada's commodity-linked currency.

Rising U.S. crude prices typically help the Canadian dollar as Canada is a net oil exporter. But strong oil prices have also fueled concerns that they could inspire inflation, which might choke the global economic recovery.

The Middle East tensions stoked further appreciation in crude oil prices and demand for safe haven currencies at the broad expense of the greenback.

"In other times, you've had a flight to safety bid to the U.S. dollar that may have counteracted some of the positive news on Canada but the U.S. dollar is struggling here," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

"In the initial stages of the rally in oil prices, (the Canadian dollar) really didn't gain too much support. But it's getting more now. It's almost by default."

He said other commodity currencies such as the New Zealand and Australian dollars were under pressure from other sources this week, "so a combination of rising oil prices and no better alternatives around have helped Canada somewhat."

At 8:05 a.m., the Canadian dollar was at C$0.9840 to the U.S. dollar, or $1.0173, up from Wednesday's finish at C$0.9886 to the U.S. dollar, or $1.0115. It had reached as high as 0.9822 to the U.S. dollar, or $1.0181, not far from the March 2008 high reached last week at C$0.9816 to the U.S. dollar, or $1.0187. If broken, a run toward C$0.9800 may be in the cards, analysts say.

However, analysts said to be mindful of C$0.9960 to the U.S. dollar, or $1.0040, its weakest point since February 11 that was hit in the previous session.

Canadian government bond prices were higher across the curve, tracking U.S. Treasuries, as the revolt in Libya spurred safe-haven demand.

The two-year Canadian government bond was up 1 Canadian cent to yield 1.794 percent, while the 10-year bond gained 24 Canadian cents to yield 3.298 percent.

No major Canadian data is scheduled for the rest of the week. The next major data is the December and fourth-quarter read on economic growth on Monday, followed by the Bank of Canada's policy setting decision on Tuesday.

(Reporting by Ka Yan Ng)

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