TORONTO: The Canadian dollar strengthened against its US counterpart on Wednesday as oil rose and data showed the economy contracting less than expected in April, but the currency was on track to post its biggest monthly decline since March last year.

Canadian GDP fell 0.3% in April as businesses were shut down during the COVID-19 pandemic, beating analyst forecasts of a 0.8% decline, Statistics Canada data showed.

A preliminary estimate showed that the economy weakened a further 0.3% in May. Some provinces waited until June to ease restrictions.

"April and May were likely temporary setbacks to the recovery," said Sri Thanabalasingam, senior economist at TD Economics. "Reopening across the country, falling cases and hospitalizations, and an extraordinary vaccine rollout, should lead to a rapid bounce back in economic activity."

The price of oil, one of Canada's major exports, rose after industry data suggested US crude stockpiles were shrinking.

US crude prices rose 0.8% to $73.58 a barrel, while the Canadian dollar was trading 0.2% higher at 1.2375 to the greenback, or 80.81 US cents. Earlier, it touched its weakest level since June 21 at 1.2423.

For the month, the loonie was on track to decline 2.5% as a hawkish shift in guidance by the Federal Reserve boosted the US dollar. The release of the US nonfarm payrolls report on Friday could offer investors further clues about the Fed outlook.

Canadian government bond yields edged lower across much of the curve, with the 10-year down about half a basis point at 1.410%. Canada's bond market is due to close early ahead of the Canada Day holiday on Thursday.