TORONTO: The Canadian dollar on Thursday strengthened to its highest level in more than three months against its US counterpart, as higher oil prices bolstered the case for multiple Bank of Canada interest rate hikes next year.

The loonie was trading 0.6pc higher at 1.2370 to the greenback, or 80.84 US cents, after touching its strongest level since July 6 at 1.2355.

"I characterize it (the rally) as finally starting to catch up to the oil price fundamentals which argue that we should be looking at USD-CAD below 1.20," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

If oil were to stay at current levels it could help justify the Bank of Canada raising interest rates "several times next year," Anderson added.

Canadian dollar firms as risk appetite rebounds

The price of oil, one of Canada's major exports, settled 1.1pc higher at $81.31 a barrel after top producer Saudi Arabia dismissed calls for additional OPEC+ supply and the International Energy Agency said surging natural gas prices could boost demand for oil among power generators. Crude has soared about 30pc since August.

Money markets expect three rate hikes in 2022 by the Bank of Canada, a faster pace of tightening than seen for the Federal Reserve, with expectations raised by data last Friday showing that Canada has added back all the jobs it lost during the pandemic.

Data on Thursday added to evidence that the Canadian economy has recovered after a surprise contraction in the second quarter. Factory sales rose 0.5pc in August from July.

Gains for the loonie came as rising risk appetite put a brake on the safe-haven US dollar's recent rally.

The Canadian 10-year yield eased 5.5 basis points to 1.547pc, tracking the move in US Treasuries, after touching on Tuesday its highest since January 2020 at 1.683pc.