The Canadian dollar strengthened to a five-week high against the greenback on Wednesday, boosted by hopes of a trade deal between the United States and China and increased expectations of a Bank of Canada interest rate hike this year.
The Bank of Canada held interest rates steady as expected on Wednesday but said more increases would be necessary even though low oil prices and a weak housing market will harm the economy in the short term.
“I think they are basically saying, look can you give us a bit of rope. Maybe that rope is three-months, six-months and then we can reassess,” said Amo Sahota, director at Klarity FX.
Chances of a rate hike by December rose to 45 per cent from about 30 per cent before the policy announcement, data from the overnight index swaps market showed.
“I think it points to how the front-end of the Canada curve is too rich,” said Derek Holt, vice president of capital markets at Scotiabank. “The market went too far in terms of pricing out rate hikes further on.”
The Canadian dollar is expected to rally in 2019, recovering some of last year’s decline, as the Bank of Canada surprises speculators who are betting it has already finished raising interest rates, a Reuters poll showed.
Stocks and the price of oil climbed after talks between the world’s two largest economies raised hopes an all-out trade war could be averted. U.S. crude oil futures settled 5.2 per cent higher at $52.36 a barrel.
Canada is a major exporter of commodities, so its economy could benefit from an improvement in the global trade outlook.
At 3:56 p.m. (2056 GMT), the Canadian dollar was trading 0.4 per cent higher at 1.3216 to the greenback, or 75.67 U.S. cents. The currency touched its strongest intraday level since Dec. 4 at 1.3180.
Gains for the loonie came as data showed stronger-than-expected Canadian housing starts in December.
The seasonally adjusted annualized rate of housing starts fell to 213,419 units from an upwardly revised 224,349 units in November, the Canadian Mortgage and Housing Corporation said. Economists had expected starts to fall to 205,000 units.
Canadian government bond prices were lower across the yield curve, with the 10-year falling 18 Canadian cents to yield 1.989 per cent.
The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 3.2 basis points to a spread of 65.1 basis points in favour of the U.S. bond.