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Canadian bonds gain on short covering, likely to fall on rebound in energy prices

The Canadian government bonds gained Monday as investors cover last week’s short positions. We foresee that the bond prices will tumble intraday following a recovery in crude oil prices.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 2-1/2 basis points to 1.554 percent, the yield on long-term 30-year note dipped 2 basis points to 2.195 percent and the yield on short-term 2-year bond slid 1/2 basis point to 0.666 percent by 12:30 GMT.

The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Crude oil prices recovered on rising consensus that the OPEC will find a way to reduce production. The International benchmark Brent futures rose 1.96 percent to $47.78 and West Texas Intermediate (WTI) jumped 1.79 percent to $46.51 by 12:30 GMT.

Last week, the Canada CPI report revealed a 0.2 percent m/m reading for October, versus the unrevised +0.1 percent m/m  result seen in September, in line with market expectations for a +0.2 percent m/m reading. On an annual basis, it rose 1.5 percent y/y, from previous 1.3 percent y/y, from previous 1.5 percent y/y.

Lastly, Canadian stocks are set to open a stronger session on Monday, as rebounding oil prices could drive gains in the energy sector.

The S&P/TSX Composite Index rose 0.26 percent at the close of the trading session to 14,864.03 on Friday.

While at 12:00 GMT, the FxWirePro's Hourly Canadian Dollar Strength Index remained slightly bullish at 81.54 (higher than 75 represents purely bullish trend).

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