C$ notches weekly gain as risk appetite picks up

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar rebounded to edge higher against its U.S. counterpart on Friday as improved investor sentiment offset further widening in yield spreads between U.S. and Canadian bonds.

The loonie traded 0.1% higher at 1.3585 to the greenback, or 73.61 U.S. cents, after moving in a range of 1.3556 to 1.3644. For the week, it was up 0.2%, after a two-week decline.

Given the rally in equities and higher oil prices, the Canadian dollar should probably have done better, said Amo Sahota, director at Klarity FX in San Francisco.

"So what's holding it back? You look at the rate spread between the U.S. and Canada - it just keeps widening out," Sahota said.

Canada's 2-year yield fell 3.4 basis points further below its U.S. equivalent to a gap of about 63 basis points, near its widest since May 2019, as investors bet that the Bank of Canada would pause its interest rate hiking campaign at a policy-making meeting next Wednesday.

U.S. stock indexes rallied and the price of oil, one of Canada's major exports, settled 1.9% higher at $79.68 a barrel.

Oil recovered from a slump after Reuters reported that the United Arab Emirates was not planning to exit the Organization of the Petroleum Exporting Countries.

Domestic data was downbeat, showing the value of building permits fell 4.0% in January and labor productivity down for a third straight quarter.

Still, analysts affirmed forecasts for a stronger Canadian dollar over the coming year, expecting an improved global economy and less central bank uncertainty to support the commodity-linked currency, a Reuters poll showed.

The Canadian 10-year yield fell 12.4 basis points to 3.351% as U.S. yields pulled back from recent highs.

(Reporting by Fergal Smith; Editing by Hugh Lawson and Richard Chang)