Canadian dollar firms against weaker U.S. dollar as oil prices rally

By Solarina Ho

TORONTO (Reuters) - The Canadian dollar strengthened against a softer greenback on Tuesday as oil prices rallied, while domestic housing data also provided support.

Planned export cuts by Saudi Arabia and other signs of market rebalancing drove oil prices higher, with U.S. crude futures jumping 2.7 percent to settle at C$50.92 a barrel.

The typically tight correlation between prices of oil, a major Canadian export, and the loonie had broken down in recent months as central bank monetary policy decisions steered investor direction.

"We find this reversal in the Canadian dollar a little bit more commodities driven than rates driven," said Don Mikolich, executive director, foreign exchange sales at CIBC Capital Markets. "That has provided the momentum that has been absent for a while."

At 4:00 p.m. ET, the Canadian dollar was trading at C$1.2511 to the greenback, or 79.93 U.S. cents, up 0.3 percent.

The loonie, which has weakened some 4 percent since early September after the Bank of Canada dampened further rate hike expectations and said it was monitoring the currency's movements, traded between C$1.2484 and C$1.2555 on Tuesday.

Canada's bond and stock markets were closed on Monday, the Canadian Thanksgiving Day holiday.

Earlier in the session, separate data showed that Canadian housing starts dipped in September, but did not fall as much as expected, capping another quarter of strong home building growth, though a drop in August building permits suggested the long boom is cooling.

"I think the housing starts number this morning was certainly a positive plug for the Canadian dollar. People had been looking for some signs of softening," said Mikolich.

Domestic data on Friday showed a pickup in wages and reduced worries that the economy will slow in the second half of the year.

Speculators have raised bullish bets on the loonie to the highest since November 2012, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday.

Canadian government bond prices inched higher across the yield curve, with the two-year up half a Canadian cent to yield 1.548 percent and the 10-year up 6 Canadian cents to yield 2.12 percent.

Canadian Prime Minister Justin Trudeau will meet President Donald Trump on Wednesday. He will try to persuade the U.S. leader to focus on Mexico as a source of potential problems at talks to update the North American Free Trade Agreement.

(Reporting by Solarina Ho and Fergal Smith; editing by Susan Thomas and Grant McCool)