Crude oil climbed to a record high for the second day in a row. Nymex crude briefly touched $122.73 a barrel on worries that violence in the Niger Delta could spread and cut off supply.

Mathieu Tessier, a commodities and futures specialist at ScotiaMcLeod, said speculation and bullish technical signals are also fuelling the rally. In February, Tessier correctly predicted oil would rally to $120.

"I don't see any big pullback coming but it's perhaps a little overbought in the short term … By the end of the summer I would put some chips on $150," Tessier said.

The Canadian dollar benefited from the oil price rise along with a broad-based commodity rally that pushed natural gas futures to a 28-month high of $11.364/mmbtu. The 19-commodity CRB index climbed 1.1% to 418.54.

"The Canadian dollar really took off after oil hit new highs," said Matthew Strauss, currency strategist at RBC Capital Markets. "During the last month, oil as a driver of the Canadian dollar has become very important; which wasn't the case at the end of last year."

The Canadian dollar's rise peaked at 0.9998 USD. Strauss said a rise above technical resistance at 1.0009 could spark a two-cent rally.

The loonie was also bolstered by the Ivey Purchasing Managers' Index. It slipped slightly in April to 57.6 from 59.0 the month before, but still came in better than the 54.0 consensus estimate of analysts.

The Canadian dollar is up 0.0101 to 0.9978 USD, up 0.96 to 104.53 against the yen and higher by 0.0191 to 1.9778 against the pound sterling. The euro is down 0.0129 to 1.5563 against the CAD.

Canadian stocks also benefited from the commodities rally. Toronto's S&P/TSX composite index closed up 139.96 points to 14414.30.

Also in Canada, March building permits declined 4.5% after increasing 0.8% in February, Statistics Canada said. Economists were expecting a 1.2% increase and the miss helped Canadian government bonds rally to session highs.

Yields on two-year Canadian government bonds were up 3.8 bps to 2.82% after hitting session lows of 2.73% following the release of permits data. Five-year yields were up 5.7 bps to 3.16%, 10-year yields up 6.4 bps to 3.69% and 30-year yields up 6.7 bps to 4.18%.

In the U.S., Treasuries rallied across the curve following a quarterly report from mortgage finance company Fannie Mae. The U.S. government-sponsored enterprise was expected to report a net loss of 64 cents a share but lost $2.57 a share. Fannie Mae said it will cut its dividends and raise $6 billion in capital. Shares were down as much as 12% in premarket trading but boomeranged to close up 8.7%.

Most of the curve gave up gains as Fannie Mae bounced back but U.S. two-year yields were down 4.0 bps to 2.38%. Five-year yields were flat at 3.16%, 10-year yields up 4.9 bps to 3.92% and 30-year yields up 6.2 bps to 4.66%. The Eurodollar September 08 contract is up 1.5 ticks to 97.32. The 10/2 year spread widened 9.34 bps to 154.02. The yield curve is steeper with the difference in yield between the U.S. two-year and 10-year notes up 9.3 bps to 154.02 bps.

Strategists said the selloff was aided by the details of Federal Reserve's $75 billion Term Auction Facility -- which had a stop-out rate of 2.22% and bid-to-cover ratio of 1.29 -- and a $5 billion sale of U.S. 3-year paper.

The Dow Jones industrial average closed up 51.29 points to 13020.83, the S&P 500 up 10.77 points to 1418.26 and the Nasdaq up 19.19 points to 2483.31.

Elsewhere, returns on two-year German bonds are down 5.6 bps to 3.77%, five-year yields down 5.2 bps to 3.89%, 10-year yields down 2.5 bps to 4.13% and 30-year yields down 0.9 bps to 4.61%.

Yields on UK two-year bonds are down 7.7 bps to 4.42%, five-year yields down 7.8 bps to 4.38%, 10-year yields down 7.0 bps to 4.67% and 30-year yields down 4.5 bps to 4.50%.

European stock markets closed with the Eurostoxx down 19.14 points to 3262.20, the UK FTSE 100 down 0.30 points to 6215.20 and the German DAX down 34.98 points to 7017.10.

Aside from the broad Canadian dollar rally, foreign exchange trading was relatively quiet.

The euro is up 0.0032 to 1.5529 against the USD and higher by 0.20 at 162.68 against the yen.

The Australian dollar is higher by 0.0033 to 0.9502 USD.

The U.S. dollar is down 0.09 to 104.77 against the yen and the pound is up 0.0014 to 1.9735 USD and the U.S. Dollar Index was down 0.1720 to 73.0180.

All data taken at 4:34 p.m. EDT.

By Adam Button, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it