(Reuters) - The Canadian dollar rose to a two-week peak against the U.S. dollar on Wednesday on stronger-than-expected domestic growth data and a move by major central banks to increase liquidity in the global financial system.
The currency touched a session high of C$1.0124 against the U.S. dollar, or 98.78 U.S. cents, its best level since November 14.
Data showed the Canadian economy grew at an annualized rate of 3.5 percent in the third quarter, recovering from a 0.5 percent contraction in the second quarter as Canada felt the economic effects of Japan’s earthquake and tsunami.
A Reuters survey of analysts had forecast a rise of 3.0 percent. By contrast, third-quarter real gross domestic product in the United States grew 2.0 percent.
“It was better than expected. A lot better than the Bank of Canada expected so it clearly diminishes the risk of a rate cut,” said Sal Guatieri, senior economist at BMO Capital Markets.
“The lower prospect of a rate decline is generally good for the currency because capital continues to flow into our debt market.”
The Bank of Canada will not raise interest rates again until the fourth quarter of next year as Europe’s worsening debt crisis dims the outlook for the global economy, according to a Reuters survey.
The Canadian dollar ended at C$1.0203 against the U.S. dollar, or 98.01 U.S. cents, sharply higher than Tuesday’s North American close of C$1.0303 to the U.S. dollar, or 97.06 U.S. cents.
The currency was already on firmer ground heading into the GDP report, after global central banks - including the Bank of Canada - announced a co-ordinated move to keep funds flowing through financial markets that are being rocked by Europe’s escalating debt crisis.
“The global coordinated action which was launched today by the major central banks has led to the predominant risk-on theme in the market today,” said Mazen Issa, macro strategist at TD Securities.
Issa added the Canadian dollar has been trading in tight correlation with the S&P 500, which soared on Wednesday to finish above 4 percent. .N
The announcement prompted investors to flock to riskier assets and dump the safe-haven U.S. dollar. Currencies such as the Australian, New Zealand, and Canadian dollars, as well as the euro benefited.
Currency strategists said that part of the big move on Wednesday was related to end-of-month hedging activity and portfolio rebalancing, which was so far proving to be U.S.-dollar negative.
The move higher has brought the prospect of a return by the Canadian dollar to parity with the greenback in view.
Issa said the next key levels to watch out for included C$1.0080 against the greenback, and C$1.0281.
Canadian government bond prices retreated across the curve, tracking U.S. Treasuries lower amid lowered safe-haven appetite.
The two-year bond sank 3 Canadian cents to yield 1.01 percent, while the 10-year bond dropped 22 Canadian cents to yield 2.150 percent.
Additional reporting by Claire Sibonney