TORONTO: The Canadian dollar firmed against its US counterpart on Thursday, as crude prices soared more than 10 percent following a global equities rally and an unexpected drop in US oil inventories.
The loonie, which fell to 11-year lows earlier this week as investors rushed to safety on worries about slowing growth in China, also gained against other major currencies.
The strength came even as the greenback rose against a basket of currencies following upbeat US data that showed the economy grew faster than initially thought during the second quarter. The data was reassuring to investors and central bank officials preoccupied by worries over China's impact on the global economy.
"Definitely a lot of volatility, a lot of confusion, a lot of uncertainty. Obviously it all started with China, that's kind of the elephant in the room," said Rahim Madhavji, President at KnightsbridgeFX.com.
"But what we're seeing today is obviously oil, which is up very, very sharply ... so that bodes really well for the Canadian dollar."
The price of oil, a key Canadian export, was supported by data on Wednesday showing US crude inventories fell 5.5 million barrels in the week to Aug. 21, the biggest one-week decline since early June. US prices settled nearly $4 higher, or 10.26 percent, at $42.56 a barrel.
The Canadian dollar closed at C$1.3218 to the US dollar, or 75.65 US cents, extending Wednesday's gains and erasing much of the week's volatile losses. The Bank of Canada's official close on Wednesday was C$1.3315, or 75.10 US cents.
The Canadian dollar swung broadly during the session, trading between C$1.3180 and C$1.3305.
Madhavji expects the loonie to settle back into rangebound moves, given China's uncertain growth outlook, questions over where commodities prices are headed and how that might impact the Bank of Canada's decision making, and as markets await clarity on the timing of the Federal Reserve's expected interest rate hike.
"There are a lot of things pulling at the loonie. It's going to keep it relatively rangebound until the cards fall on the table," he said.
Canadian government bond prices were mostly higher across the maturity curve, with the two-year price off 3 Canadian cents to yield 0.404 percent and the benchmark 10-year sliding 24 Canadian cents to yield 1.467 percent.
The Canada-US two-year bond spread widened to -29.6 basis points, while the 10-year spread narrowed to -72.4 basis points.
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