Canadian dollar strengthens as oil surges nearly 5%

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday as oil, one of Canada's major exports, rallied and ahead of a Bank of Canada policy meeting next week that could see the central bank cut its bond purchases.

The loonie was up 0.1% at 1.2517 to the greenback, or 79.89 U.S. cents, notching its second straight day of gains. It traded in a range of 1.2500 to 1.2575.

"It looks like we are getting the benefit of a weakening U.S. dollar and a strengthening oil price," said Colin Cieszynski, chief market strategist at SIA Wealth Management.

The U.S. dollar lost ground against a basket of major currencies, while oil surged after a report from the International Energy Agency, followed by U.S. inventory data boosted optimism about returning demand. U.S. crude oil futures settled 4.9% higher at $63.15 a barrel.

The Bank of Canada could announce next Wednesday it is cutting bond purchases by C$1 billion per week to C$3 billion, say some strategists.

The central bank will have to balance a hot housing market with a return to lockdowns in some provinces to contain the coronavirus but is likely to stay more hawkish than the Federal Reserve, Cieszynski said.

Fed officials have said that brighter economic forecasts and a brief period of higher inflation will not affect monetary policy, and the central bank will keep its support in place until the crisis is over.

Also next week, Canada's government will present its first budget in two years. It will deliver on its promise to spend big amid a fast-rising third wave of COVID-19 infections and ahead of an election expected in coming months.

Canadian government bond yields were higher across a steeper curve, tracking U.S. Treasuries. The 10-year rose 2.3 basis points to 1.528%.

(Reporting by Fergal Smith; editing by John Stonestreet and Grant McCool)