The Canadian dollar strengthened to a near six-week high against the U.S. dollar on Tuesday, supported by improvement in risk appetite and a less dovish Bank of Canada policy announcement last week than some investors had expected.
The Bank of Canada held interest rates steady last Wednesday and made no mention of future cuts despite easing this year by some of its global peers, including the U.S. Federal Reserve.
Chances of a rate cut at the central bank’s next meeting on Oct. 30 have slumped to about 15 per cent from nearly 70 per cent before last week’s rate decision, money market data showed.
We are seeing “position unwinding, given that people were looking for a dovish Bank of Canada meeting,” said Mark McCormick, North American head of FX strategy at TD Securities. “The other thing is that we are getting more momentum because risk appetite is improving as well.”
The S&P 500 fell on Tuesday but has rallied as much as 5.9 per cent since August. Canada’s bond yields are higher than many major issuers of sovereign debt, so its currency tends to benefit from a pick-up in the flow of global capital.
At 3:57 p.m., the Canadian dollar was trading 0.1 per cent higher at 1.3151 to the greenback, or 76.04 U.S. cents. The currency touched its strongest intraday level since July 31 at 1.3134.
Gains for the loonie coincided with data from the national housing agency showing that Canadian housing starts unexpectedly rose in August, climbing 1.9 per cent from July. Separate data from Statistics Canada showed that the value of Canadian building permits increased by 3.0 per cent in July from June.
“The construction side of the Canadian housing market still looks rock solid,” Robert Kavcic, a senior economist at BMO Capital Markets, said in a note.
Meanwhile, the price of oil, one of Canada’s major exports, was put under pressure by U.S. President Donald Trump’s firing of national security adviser John Bolton, which raised speculation of a return of Iranian crude exports to the market. U.S. crude oil futures settled 0.8 per cent lower at $57.40 a barrel.
Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries and German Bunds. The 10-year yield touched its highest intraday level since Aug. 1 at 1.435 per cent.
Canadian Prime Minister Justin Trudeau will formally launch the campaign for an Oct. 21 national election on Wednesday, sources from his Liberal party said.
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