The Canadian dollar weakened slightly against a stronger U.S. counterpart on Monday, pulling back from Friday's three-month high even as optimism in a business survey supported bets that the Bank of Canada would raise interest rates next week.
The likelihood of a rate hike on Jan. 17 jumped to more than 85 per cent after the central bank released a report showing Canadian companies remain optimistic about future sales as signs of capacity pressures and labor shortages have picked up.
"It said businesses aren't deeply concerned, as they lay out their investment plans, about the risk of NAFTA really skidding off the rails, and that's comforting to the Bank of Canada as it raises rates," said Derek Holt, head of capital markets economics at Scotiabank.
The report reinforced hike expectations after data on Friday showed the economy added almost 80,000 jobs in December for the second month in a row.
It pushed the yield on Canada's two-year bond to its highest since June 2011 at 1.795 per cent.
The U.S. dollar climbed against a basket of major currencies as investors in the euro took profits after a recent rally.
At 4 p.m. EST (2100 GMT), the Canadian dollar was down 0.1 per cent at $1.2423 to the greenback, or 80.50 U.S. cents. The currency traded in a range of $1.2378 to $1.2450.
On Friday, the loonie touched its strongest since Sept. 27 at $1.2355.
Still, speculators have cut bullish bets on the Canadian dollar to their lowest since July, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. As of Jan. 2, net long positions had fallen to 14,739 contracts from 17,346 a week earlier.
Prices of oil, one of Canada's major exports, edged higher on a slight decline in the number of U.S. rigs drilling for new production and the Organization of the Petroleum Exporting Countries' sustained output cuts.
Canadian government bond prices were mostly lower across the yield curve, with the two-year down 1.5 cents to yield 1.784 per cent and the 10-year off 4 cents to yield 2.159 per cent. The 30-year issue was up 5 cents to yield 2.356 per cent.