C$ gains as Bank of Canada expresses optimism

Wed Jul 13, 2016 5:17pm EDT
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By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar hit its strongest level since July 7 against its U.S. counterpart on Wednesday after the Bank of Canada held rates steady and trimmed its economic forecasts, as traders unwound bets that the central bank could cut rates this year.

Still, analysts said the currency faces an uphill battle to strengthen further despite the central bank's optimism that exports and business investment would pick up, as economic data in coming months will likely remain less than robust.

"You still have a lot of weak data to wade through and the bar has been set relatively high for growth," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada. "There's room for disappointment in the near term."

The Canadian dollar settled at C$1.2986 to the greenback, or 77.01 U.S. cents, stronger than the Bank of Canada's official Tuesday close of C$1.3030, or 76.75 U.S. cents.

It touched C$1.2936 soon after the central bank's updated outlook was published, versus C$1.3069 just before.

Economists said the bank's comments did not do enough to bolster a minority view that rates would need to be trimmed this year.

"While we can't rule it out, I'd say there really isn't much sense here that the Bank's leaning in that direction, so the initial reaction has been a stronger Canadian dollar and I think that's appropriate," said Doug Porter, chief economist at BMO Capital Markets.

Overnight index swaps, which track expectations for the central bank's main policy rate, showed traders reduced bets on a rate cut following the news.   Continued...

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015.   REUTERS/Mark Blinch