OTTAWA: The Canadian dollar firmed against the greenback on Thursday, lifted by higher oil prices, although the strength was not expected to last as investors try to gauge whether the US central bank will hike interest rates as early as next week.
The loonie is down nearly 14 percent for the year so far, but it has traded largely sideways in recent weeks despite some big day-to-day swings.
After the Bank of Canada held interest rates steady on Wednesday, as expected, attention is turning to next week's rate decision from the US Federal Reserve, which could raise rates for the first time in nearly a decade.
Whether a rate hike comes next week or later in the year, the Canadian dollar is likely to weaken as investors favor the US dollar, said Ken Wills, CanadianForex's Head of Corporate Exchange North America.
But once the rate increase is out of the way, the loonie could bounce back to the C$1.31 or C$1.3080 levels, he said.
"I'm anticipating over the fall, whether they do it in September or October, we could be looking at a pretty good scenario where it's sell the rumor, buy the fact," Wills said.
But for Thursday's session, a 4 percent increase in the price of oil gave the loonie some support.
The Canadian dollar ended the North American trading session at C$1.3228 to the greenback, or 75.60 US cents, compared with the Bank of Canada's official Wednesday close of C$1.3250, or 75.47 US cents.
The currency had briefly touched $1.3179 on the oil rally, but pared gains near the end of the session alongside US equities, which also gave up some of their early gains.
"The market went back to buying USD/CAD on risk aversion. Two variables have surged in how they drive USD/CAD - one of them is risk appetite ... The other is oil," said Greg Anderson, global head of foreign exchange strategy with BMO Capital Markets in New York.
US crude settled up $1.77 at $45.92 a barrel.
Canadian government bond prices were mostly lower across the maturity curve, with the two-year price down 2 Canadian cents to yield 0.467 percent and the benchmark 10-year falling 4 Canadian cents to yield 1.495 percent.
The Canada-US two-year bond spread was -27.0 basis points, while the 10-year spread was -73.2 basis points.
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