C$ strengthens on oil, less dovish than expected Bank of Canada

By Fergal Smith TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil rallied and after the Bank of Canada's press release was less dovish than some investors had expected. The Bank of Canada kept interest rates on hold at 0.50 percent on Wednesday, saying the economy would shrink in the second quarter as a result of damage from recent wildfires in Alberta before rebounding later in the year. "It's a fairly neutral looking statement," said Shaun Osborne, chief currency strategist at Scotiabank, who added that the loonie benefited from a relief rally after the central bank was not as dovish as some had been looking for. Overnight index swaps implied just a 4 percent chance of a rate cut this year, slightly lower than before the Bank of Canada interest rate decision and well below the 40 percent probability implied two weeks ago after a wildfire cut production in Alberta's oil sands region. Oil rose as crude inventories fell more sharply than expected, although some gains were pared as prices approached $50 per barrel. U.S. crude prices were up 0.45 percent to $48.84 a barrel. [O/R] Adding to support for risk-sensitive commodity-linked currencies such as the Canadian dollar, stocks climbed as risk eased that Britain and Greece would leave the European Union, while German business morale improved more than expected in May. At 11:22 a.m. EDT (1522 GMT), the Canadian dollar was trading at C$1.3085 to the greenback, or 76.42 U.S. cents, stronger than Tuesday's official close of C$1.3146, or 76.07 U.S. cents. The currency's weakest level was C$1.3133, while it touched its strongest since May 19 at C$1.3052. Still, the loonie has fallen near 5 percent from its 10-month high of C$1.2461 on May 3, pressured by speculation that the U.S. Federal Reserve will raise interest rates as early as next month, as well as a weaker outlook for Canada's economy following a strong start to 2016. Canadian government bond prices were mixed across the maturity curve, with the two-year price flat to yield 0.629 percent and the benchmark 10-year rising 8 Canadian cents to yield 1.356 percent. The Canada-U.S. two-year bond spread was 0.7 of a basis point less negative at -28.9 basis points as Canadian government bonds underperformed slightly at the front of the curve. (Reporting by Fergal Smith; Editing by Bernadette Baum and Chris Reese)