The Bank of Canada, which has hiked five times since July 2017 to leave its benchmark interest rate at 1.75 percent, is widely expected to refrain from further tightening on Wednesday following recent volatility in stock markets and the price of oil, one of Canada's major exports.
Still, the central bank said as recently as last month that it will need to raise rates further to a neutral range of between 2.50 percent and 3.50 percent to achieve its inflation target.
"I think there are people thinking that the bank will stick to its guns a little bit, at least in terms of eventually getting back to neutral, and if so that should be supportive of the currency," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
Domestic data showed a surprise pick-up in the pace of purchasing activity in December. The Ivey Purchasing Managers Index rose to 59.7 from 57.2 in November, surpassing analysts' expectations for 56.8.
At 4:07 p.m. (2107 GMT), the Canadian dollar
Gains for the loonie came as the price of oil rebounded further from 1-1/2-year lows reached in December, on support from OPEC production cuts and steadying equities markets. U.S. crude oil futures settled 1.2 percent higher at $48.52 a barrel.
Stocks advanced for a second straight session as the resumption of U.S.-China trade talks helped ease concerns that have pummeled the market in recent months, while the U.S. dollar <.DXY> was pressured by growing expectations the U.S. Federal Reserve will either pause or halt its interest rate hike cycle.
Canadian government bond prices were lower across a flatter yield curve in sympathy with U.S. Treasuries, with the two-year
Last Thursday, the 10-year yield hit its lowest since August 2017 at 1.814 percent.
(Reporting by Fergal Smith; Editing by Alistair Bell and Tom Brown)
By Fergal Smith
