Canadian dollar gains as calmer bond market bolsters sentiment

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday, adding to sharp gains from the day before, as financial market volatility caused by higher bond yields faded and domestic data showed faster-than-expected economic growth.

The loonie was trading 0.3% higher at 1.2611 to the greenback, or 79.30 U.S. cents, having traded in a range of 1.2600 to 1.2698. On Monday, it climbed 0.7%, its biggest gain in nearly six weeks.

"I think essentially the mini tantrum we had in the bond market last week has calmed down a little bit," said Shaun Osborne, chief currency strategist at Scotiabank. "It's more of a pro-risk mood, which is beneficial for the Canadian dollar.

Global equity markets held on to the previous day's rally as investors paused to gauge whether the jump in bond yields had run its course, while they monitored progress on the next U.S. fiscal stimulus.

Canada sends about 75% of its exports to the United States, including oil. U.S. crude oil futures settled 1.5% lower $59.75 a barrel ahead of this week's OPEC+ meeting, with producers in the group expected to ease supply curbs.

Canada's economy grew at an annualized rate of 9.6% in the fourth quarter, beating analyst expectations of 7.5%, and it likely rose again in January, boosting speculation that the Bank of Canada will reduce its bond purchases soon.

Still, the central bank will likely manage tapering carefully to avoid triggering a "significant squeeze" higher in the Canadian dollar, Osborne said.

Canada's 10-year yield was little changed at 1.343%, while the gap between it and its U.S. equivalent narrowed by about 3 basis points to a spread of 7 basis points in favor of the U.S. bond.

(Reporting by Fergal Smith; Editing by Kirsten Donovan and Alistair Bell)