C$ rallies as investors weigh 'tension' in rates market

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday as oil prices rebounded and the greenback's recent rally took a breather, with investors awaiting the release of June jobs data that could inform the outlook for interest rates.

The loonie was up 0.4% at 1.2980 to the greenback, or 77.04 U.S. cents, after trading in a range of 1.2964 to 1.3055. On Tuesday, it touched its weakest since November 2020 at 1.3083.

"There's a lot of tension in the rates market right now," said Marty Halpin, interim head of markets at HSBC Bank Canada. "That tension derives from how are the central banks going to deal with inflation versus are we coming in for a hard landing."

Canadian and U.S. employment data, due on Friday, could provide clues on the strength of the North American economy as the Federal Reserve and Bank of Canada prepare markets for additional tightening to tackle soaring inflation.

Money markets expect the BoC to raise its benchmark rate next week by three-quarters of a percentage point, which would be its biggest hike in 24 years.

The Canadian dollar will gain less ground than previously thought over the coming year as the growing risk of a global economic slowdown bolsters demand for safe-haven currencies such as the U.S. dollar, a Reuters poll showed.

The greenback steadied on Thursday against a basket of major currencies, after posting a 20-year high the previous day.

Canada's trade surplus widened to C$5.3 billion ($4.1 billion) in May, as higher prices for energy products boosted exports.

Oil, one of Canada's major exports, settled 4.3% higher at $102.73 a barrel after steep losses in the previous two sessions.

Canadian bond yields rose across the curve, tracking the move in U.S. Treasuries. The 10-year was up nearly 4 basis points at 3.230%.

(This story corrects first, second and fourth bullets for updated prices)

(Reporting by Fergal Smith; editing by Jonathan Oatis)