C$ rallies as drop in oil prices bolsters risk appetite

The Canadian dollar strengthened against its U.S. counterpart on Thursday as investors bet that a decline in oil prices, a key driver of inflation, would make it more likely that the Federal Reserve scales back its cycle of interest rate hikes.

The loonie USDCAD was trading 0.5% higher at 1.3580 to the greenback, or 73.64 U.S. cents, recovering some ground after it touched on Wednesday its weakest level in more than a month at 1.3699.

"Oil has taken another turn lower but markets have looked at it and decided that lower oil might actually be good for the loonie because the Fed will hike less and that's good for risk appetite," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.

U.S. crude oil futures CL1! fell to their lowest level this year, settling down 0.8% at $71.46 a barrel, but Wall Street rebounded as a rise in U.S. weekly jobless claims supported expectations for the pace of rate hikes to soon slow.

The Bank of Canada will study the latest economic data to gauge whether to raise interest rates further, Deputy Governor Sharon Kozicki said, adding it would still move forcefully if necessary.

On Wednesday, the BoC raised rates by half a percentage point to 4.25%, the highest in nearly 15 years, and signaled that its unprecedented tightening campaign was near an end.

Money markets see a roughly 35% chance that the central bank will hike by 25 basis points at its next policy meeting on January 25. (0#BOCWATCH)

Canadian government bond yields were higher across the curve, tracking moves in U.S. Treasuries.

The 10-year (CA10YT=RR) rose 4.8 basis points to 2.808%, after touching on Wednesday its lowest intraday level in nearly four months at 2.715%.