The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Wednesday and yields on Canada’s long-term debt rose by the most in nearly four months as Ottawa forecast its largest budget shortfall since the Second World War.
The loonie was trading 0.7 per cent higher at 1.3503 to the greenback, or 74.06 U.S. cents. It touched its strongest intraday level since June 23 at 1.3493.
“Clearly the initial rally was supported by global risk appetite,” said Karl Schamotta, chief market strategist at Cambridge Global Payments. “But it also looks like the larger than expected expansion in spending by the federal government in Canada helped to drive that further.”
Canada’s budget deficit is now forecast to hit $343.2 billion amid record emergency aid spending in response to the COVID-19 pandemic. That is far higher than the $28.1 billion that Canada’s ruling Liberals projected back in December, before the coronavirus crisis.
“Markets are very aware at this point that the demand shock that we’ve seen needs to be overwhelmed by government stimulus,” Schamotta said.
Wall Street was bolstered by early signs of an economic rebound, while the price of oil, one of Canada’s major exports, rose as U.S. gasoline consumption showed signs of a recovery. U.S. crude oil futures settled 0.7 per cent higher at $40.90 a barrel.
Longer-dated Canadian government bond yields climbed as Ottawa said it would be “significantly increasing long-term bonds to lock in funding at historically low interest rates.”
The share of bond offerings allocated to maturities that are 10 years or greater will nearly double in the 2020-21 fiscal year to 26 per cent of annual issuance, the government’s Debt Management Strategy document said.
The 30-year yield rose 10.7 basis points to 1.097 per cent, its biggest increase since March 17.
Canada’s jobs report for June is due on Friday.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.