Canadian dollar hits a three-year high, playing catch-up with oil

TORONTO (Reuters) - The Canadian dollar strengthened to its highest level in three years against its U.S. counterpart on Wednesday, as oil prices rose and Canadian bond yields climbed at a faster pace than their U.S. counterparts.

The loonie was trading 0.5% higher at 1.2523 to the greenback, or 79.85 U.S. cents, having touched its strongest intraday level since February 2018 at 1.2521.

"The medium term direction for CAD is pretty clear," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "Unless oil corrects lower, we should see further CAD strength as it slowly catches up to the oil move that has already happened."

Oil, one of Canada's major exports, has rallied more than 30% since the beginning of the year, while the Canadian dollar is up 1.7%.

U.S. crude oil futures settled 2.5% higher at $63.22 a barrel on Wednesday after U.S. government data showed a drop in crude output after a deep freeze disrupted production last week.

Canada's economy will see a solid and sustained rebound this year as COVID-19 inoculations ramp up, Bank of Canada governor Tiff Macklem said on Tuesday, while warning that Canada's red-hot housing market is starting to show signs of "excess exuberance".

Canadian government bond yields were higher across a steeper curve on Wednesday. The 10-year yield touched its highest since February last year at 1.360% before pulling back to 1.316%, up 7.1 basis points on the day.

The gap between Canadian and U.S. 10-year yields narrowed by 5.5 basis points to 6.4 basis points in favour of the U.S. bond.

(Reporting by Fergal Smith; editing by Emelia Sithole-Matarise and Chizu Nomiyama)

By Fergal Smith