Canadian dollar gets lift from oil rally as investors await inflation data

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as oil prices rose and investors grew more optimistic on U.S.-China trade talks, but the currency stuck to a narrow range ahead of Canada’s inflation report on Wednesday.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

U.S. stocks reclaimed ground lost to Monday’s steep sell-off as investors took heart from a tonal shift in ongoing U.S. trade negotiations with China.

Canada runs a current account deficit and exports many commodities, including oil, so its economy could be hurt by a slowdown in the global flow of capital or trade.

Oil prices rose after top exporter Saudi Arabia said explosive-laden drones launched by a Yemeni armed movement aligned with Iran had attacked facilities belonging to state oil company Aramco. U.S. crude oil futures settled 1.2% higher at $61.78 a barrel.

“I think the slight uplift in oil today has helped (the loonie),” said Amo Sahota, director at Klarity FX in San Francisco. “What I think is more significant when focusing just on the loonie is how will Canadian inflation come out tomorrow?”

Canada’s inflation report for April is due on Wednesday, which could help guide expectations for Bank of Canada interest rate policy. Money market see a nearly 40% chance of a rate cut by the end of the year.

Domestic data on Tuesday showed that home prices failed to rise for the eighth consecutive month in April.

At 3:54 p.m. (1954 GMT), the Canadian dollar was trading 0.1% higher at 1.3466 to the greenback, or 74.26 U.S. cents. The currency, which has advanced 1.3% since the start of the year, traded in a narrow range of 1.3457 to 1.3488.

Canadian Prime Minister Justin Trudeau’s strategy to prioritize spending on the middle class at the beginning of his four-year term will not keep growth humming ahead of a general election in October, some economists said.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 4.5 Canadian cents to yield 1.607% and the 10-year falling 30 Canadian cents to yield 1.697%.

The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 0.9 basis points to a spread of 60 basis points in favor of the U.S. bond, its narrowest gap since Nov. 28.

Reporting by Fergal Smith; editing by Jonathan Oatis and Sandra Maler