TORONTO: The Canadian dollar strengthened to a one-week high against its US counterpart on Thursday as oil moved briefly above $50 a barrel, while the market's expectation of future volatility for the currency fell to its lowest in four months.
US crude oil futures traded above $50 for the first time since October before settling at $49.48 a barrel, down 8 cents.
The move in oil triggered "huge desire" to cover short positions in the Canadian dollar, while some long positions in the currency were established, said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets.
The loonie's gains come one day after the Bank of Canada was less dovish than some investors had expected as it signaled the impact on the economy of the Alberta wildfires will be transitory.
Canadian dollar implied volatility, which traders use to price options on the currency, has tumbled since the interest rate decision. For 3-month options, implied volatility was at 9.3 percent on Thursday, its lowest since January.
There was a premium built into the market by those who thought the central bank might hint at the possibility of rate cuts due to the wildfires, said Patric Booth, head of trading at Velocity Trade, who sees value in buying options after volatility sold-off.
Overnight index swaps implied just a 5 percent chance of a rate cut this year, having implied a 40 percent probability just two weeks ago when the wildfire cut oil production.
The Canadian dollar ended at C$1.2970 to the greenback, or 77.10 US cents, stronger than Wednesday's close of C$1.3022, or 76.79 US
The currency's weakest level was C$1.3036, while it touched its strongest since May 18 at C$1.2912.
Domestic data for March was mixed, as average weekly earnings of non-farm payroll employees rose 0.5 percent from the previous month, while borrowing activity by Canadian small businesses fell for the fourth month in a row.
Canadian government bond prices were higher across the maturity curve in sympathy with US Treasuries. The two-year price rose 4.5 Canadian cents to yield 0.617 percent and the benchmark 10-year climbed 51 Canadian cents to yield 1.331 percent.
The Canada-US two-year bond spread was 2.1 basis points less negative at -25.8 basis points as Canadian government bonds underperformed at the front and in the belly of the curve.
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