Canadian dollar nears two-week high on NAFTA trade optimism, higher oil prices

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a near-two-week high against its U.S. counterpart on Wednesday, boosted by higher oil prices and optimism that a deal with the United States to renew the NAFTA trade pact would be reached.

At 3:05 p.m. (1905 GMT), the Canadian dollar was trading 0.6 percent higher at C$1.2991 to the greenback, or 76.98 U.S. cents.

The currency, which has advanced 1.3 percent so far this week, touched its strongest since Aug. 31 at C$1.2981.

The Canadian dollar is "strong," said Ronald Simpson, managing director, global currency analysis at Action Economics. "Its all on trade and oil ... probably more on trade."

Canadian Foreign Minister Chrystia Freeland is planning to return to Washington to hold more talks on the North American Free Trade Agreement on Thursday but plenty of work remains before the two sides can strike a deal, a well-placed Canadian source said.

"It seems to be overall that a deal is going to get done at some point ... if there is an agreement in principle I think we can probably see U.S.-CAD go to probably around (C$)1.25," Simpson said.

Canada sends about 75 percent of its exports to the United States, including autos and oil, so a deal could remove a headwind for the country's economy.

The price of oil climbed for a second straight day after a larger-than-expected drop in U.S. crude inventories and as U.S. sanctions on Iran added to concerns over global oil supply.

U.S. crude oil futures settled 1.6 percent higher at $70.37 a barrel.

Gains for the loonie came as the U.S. dollar (.DXY) lost ground against the euro in advance of the European Central Bank meeting, while traders remained worried about the trade friction between the United States and China.

Canada runs a current account deficit, so its economy could be hurt if the global flow of trade or capital slows.

Canadian industries ran at 85.5 percent of capacity in the second quarter, up from a downwardly revised 83.7 percent in the first quarter, Statistics Canada said. Economists surveyed by Reuters had forecast a rate of 86.9 percent.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The 10-year rose 8 Canadian cents to yield 2.329 percent.

On Tuesday, the 10-year yield touched its highest intraday in more than one month at 2.340 percent.

(Reporting by Fergal Smith; Editing by Steve Orlofsky and Bernadette Baum)