By Frank Pingue
TORONTO, Sept 4 (Reuters) - Higher North American equity markets and a rally in oil prices helped lift the Canadian dollar against the U.S. currency on Tuesday, but its gains were limited ahead of a Bank of Canada rate decision on Wednesday.
Domestic bond prices, with no Canadian data to consider, rose slightly ahead of the much-anticipated statement from the Bank of Canada that could offer insight on monetary policy.
The Canadian dollar closed at C$1.0494 to the U.S. dollar, or 95.29 U.S. cents, up from C$1.0562 to the U.S. dollar, or 94.46 U.S. cents, at Friday's close.
Expectations for a busy hurricane season helped lift oil prices above $75 a barrel, which is a bonus for the Canadian dollar as Canada is a major producer and exporter of oil.
A rally in North American equity markets also helped to generate buying interest in the Canadian currency as it is a sign investors are more comfortable with risky assets after the turbulence related to global credit concerns.
The Canadian dollar hit a session high of C$1.0481 to the U.S. dollar, or 95.41 U.S. cents, around midday before slipping into a tight range for the last half of the session. But it hung on for its highest close in nearly a month.
"When equity markets rally so does the Canadian dollar as the market has a little bit more of an appetite for risk." said George Davis, chief technical strategist at RBC Capital Markets. "But with the Bank of Canada (rate decision) tomorrow I think the market is going to be a little bit less committed to position-taking as a result."
A Reuters poll taken last week, after higher than expected Canadian gross domestic product data, showed Canada's primary securities dealers unanimously expect the Bank of Canada to leave its key overnight steady at 4.50 percent on Wednesday.
The market, however, will pay close attention to details of the statement that accompanies the rate decision, as it will be the bank's first since the the global credit crunch rattled financial markets in August.
"The focus will be on the accompanying statement in terms of how the bank perceives the upheaval in capital markets and what the potential impact could be on the growth profile of the Canadian economy," said Davis.
BONDS TILT HIGHER
Bond prices moved slightly higher but with little conviction as the domestic economic calendar was empty and U.S. data was mostly in line with estimates.
With no suspense around the central bank's rate decision the market will focus on the wording of the statement to see whether the tightening campaign that began in July will resume in October or get delayed further.
The central bank raised the overnight rate in July and, at the time, said some modest further tightening may be necessary. But that was before the global credit turmoil created increased risks to the Canadian economy.
"Everyone will be looking towards that balance of risk assessment from the Bank of Canada and to what extent they will be looking at potential problems with liquidity moving forward versus the downside risk out of the U.S. and also upside risks out of Canada."
The two-year bond was flat at C$99.02 to yield 4.339 percent, while the 10-year bond rose 14 Canadian cents to C$96.80 to yield 4.407 percent.
The yield spread between the two-year and 10-year bond moved to 6.8 basis points from 6.7 at the previous close.
The 30-year bond gained 38 Canadian cents to C$109.69 to yield 4.411 percent. In the United States, the 30-year treasury yielded 4.835 percent.
The three-month when-issued T-bill yielded 4.10 percent, unchanged from the previous close.
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