Loonie rises with oil prices as traders absorb rate outlook

By Leah Schnurr

(Reuters) - The Canadian dollar strengthened against the greenback on Wednesday, boosted by a rise in oil prices after strong Chinese factory activity lifted investor enthusiasm for commodities.

With little in the way of domestic drivers to influence the loonie, the currency followed oil around in a choppy session, while traders were also consolidating positions the day after dovish comments from the Bank of Canada.

The loonie was able to recover some of Tuesday's nearly 1 percent decline after the head of the central bank Stephen Poloz said a degree of untapped potential remains in the Canadian labor market, reinforcing expectations the central bank will take its time raising interest rates further.

"People have digested the remarks from Poloz, I think most of it now is priced in," said Rahim Madhavji, president at KnightsbridgeFX.com.

"It's basically setting everyone up for kicking the can down the road in terms of rate hikes," said Madhavji. "It's taken some probability of multiple rate hikes potentially off the table."

At 4:00 p.m. EDT (2000 GMT), the Canadian dollar was trading up 0.1 percent at C$1.2947 to the greenback, or 77.24 U.S. cents.

The central bank has raised rates three times since July 2017 and has said it will be cautious in considering further moves. Markets see an 80 percent likelihood that the bank hikes again in July.

Data showed China's industrial output grew 7.2 percent in the first two months of the year compared with the year before, topping expectations and boosting optimism over the outlook for commodities.

China is the world's second-largest economy and the world's largest importer of commodities.

Oil prices were also boosted by a larger-than-expected build in crude stocks. U.S. crude prices settled up 25 cents at $60.96 a barrel.

Canadian government bond prices were higher across the maturity curve, with the two-year price up 3 Canadian cents to yield 1.774 percent and the benchmark 10-year rising 32 Canadian cents to yield 2.163 percent.

(Reporting by Leah Schnurr in Ottawa; Editing by Bernadette Baum and David Gregorio)