C$ hits three-week high as oil extends rally

TORONTO (Reuters) - The Canadian dollar hit a three-week high against its U.S. counterpart and bond yields rose on Thursday as oil extended a rally after major petroleum producers agreed to cut output for the first time in eight years.

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 Organization of the Petroleum Exporting Countries reached the agreement on Wednesday after de-facto leader Saudi Arabia accepted “a big hit” and dropped a demand that archrival Iran also slash production. [O/R]

The Canadian dollar CAD=D4 settled at C$1.3317 to the greenback, or 75.09 U.S. cents, stronger than Wednesday's close of C$1.3429, or 74.47 U.S. cents and its strongest settlement since Nov. 8.

Prices for oil, a major Canadian export, jumped 4 percent, adding to a more than 10 percent gain on Wednesday. [O/R]

The loonie also gained after data on Wednesday showed that the economy accelerated in the third quarter at its fastest pace in more than two years as it benefited from a rebound in oil exports, cementing expectations that the Bank of Canada will keep interest rates steady next week.

Still, foreign exchange strategists forecast that the Canadian dollar will extend recent losses against its U.S. counterpart over the coming months as expected monetary policy divergence with the United States overshadows higher oil prices, a Reuters poll found.

“The policy divergence story is going to be a key one, given our expectation for the Fed to continue normalizing in 2017 and 2018 as well as a cut from the Bank of Canada in the second half of 2017 supports the view that dollar/Canada will move higher,” said Ian Gordon, a foreign exchange strategist at Bank of America Merrill Lynch.

Canadian government bond prices were lower across a steeper yield curve in sympathy with U.S. Treasuries as higher oil prices raised inflation expectations.

The two-year CA2YT=RR bond fell 9.5 Canadian cents to yield 0.754 percent, and the benchmark 10-year CA10YT=RR declined 71 Canadian cents to yield 1.666 percent.

The 20-year bond price slumped C$1.87 to yield 2.244 percent. Both the 10-year and 20-year yields were at their highest since December, 2015.

Canada's employment report is due on Friday. The economy is expected to have shed 20,000 jobs in November after two months of strong gains. ECONCA

Additional reporting by Fergal Smith; Editing by W Simon and Grant McCool