June 14, 2017 / 9:19 PM / in 2 months

CANADA FX DEBT-C$ pares its gains as oil prices slump, Fed hikes

 (Adds portfolio manager comments and details throughout;
updates prices)
    * Canadian dollar at C$1.3234, or 75.56 U.S. cents
    * Loonie touches its strongest since Feb. 28 at C$1.3165
    * Bond prices higher across the yield curve
    * 10-year spread vs Treasuries narrowest in 7 months

    By Fergal Smith
    TORONTO, June 14 (Reuters) - 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
signaled 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
fueling 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.          
    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."

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
David Gregorio)
  
 

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