Monday, 19 June 2017

Canadian dollar pares its gains as oil prices slump, Fed hikes

The Canadian dollar edged higher on Wednesday against its U.S. counterpart but pulled back from a 3-1/2-month high as oil prices fell sharply and the Federal Reserve raised interest rates.

The loonie has soared this week after the Bank of Canada signalled higher interest rates ahead.

Investors have moved forward their expectations for when the central bank will begin raising rates, said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management.

Chances of a rate hike this year have surged to 87 percent from less than one-in-four before stronger-than-expected jobs data on Friday.

Canadian household debt as a share of income dipped to 166.9 percent in the first quarter but remained near record highs, while separate domestic data showed that home prices rose in May.

Canada's central bank, which had long said interest rates are too blunt a tool to tackle the country's housing market, may have finally decided to act and at least limit its role in fuelling a potential bubble with low interest rates.

The U.S. dollar had been pressured by weaker-than-expected economic data but reversed most of its losses against a basket of major currencies after the Fed raised rates and said it was prepared to continue tightening monetary policy.

Crude oil prices slumped to their lowest close in seven months on Wednesday, hit by an unexpected large build in gasoline inventories. U.S. crude oil futures settled $1.73 lower at $44.73 a barrel. [O/R]

At 4 p.m. EDT (2000 GMT), the Canadian dollar was trading at C$1.3234 to the greenback, or 75.56 U.S. cents, up 0.1 percent.

The currency's weakest level of the session was C$1.3271, while it touched its strongest since Feb. 28 at C$1.3165.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year rose 4 Canadian cents to yield 0.887 percent and the 10-year climbed 51 Canadian cents to yield 1.505 percent.

The gap between the 10-year yield and its U.S. equivalent narrowed by 0.9 of a basis points to a spread of -63.7 basis points, its smallest since Nov. 8, the day of the U.S. election.

Spreads between Canada and the U.S. could narrow further as Canada's economy builds momentum in the first half of the year and as the U.S. economy shows some signs of slowing, Marjaee said. "Our portfolio strategy is to benefit from that."

Sterling inched up against the dollar on Friday, ending the week just a touch higher than where it began as political and economic worries counterbalanced the surprise of three Bank of England policymakers voting in favour of a rate hike.

Sterling surged to its highest in a week against the euro on Thursday after it emerged that the central bank's monetary policy committee had seen a 5-3 split on whether to raise interest rates immediately, amid rapidly increasing domestic consumer prices.

At a time when the BoE has blamed the rise in inflation past its 2 percent target mainly on a weak pound, traders read the split vote as a warning that officials could seek to defend the currency with rhetoric or action, even as the economy overall slows.

The pound has fallen over 15 percent since last June's vote for Brexit, although it has recovered some ground since the 31-year lows hit in October and even popped above $1.30 last month on bets that the Conservative party would increase its parliamentary majority in elections held last week.

However, with no party taking a majority, the pound sank as investors worried that a minority government would bring turmoil and could weaken Britain's hand in exit negotiations with the European Union.

Reference: Fergal Smith

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