CANADA FX DEBT-C$ strengthens to 3-week high as oil rallies
(Adds analyst quotes, details on Fed Chair Yellen's speech, updates prices) * Canadian dollar settles at C$1.2807, or 78.08 U.S. cents * Bond prices lower across the maturity curve By Fergal Smith TORONTO, June 6 (Reuters) - The Canadian dollar strengthened to a three-week high against its U.S. counterpart on Monday as oil prices rose, while expectations for a U.S. interest rate hike this month remained low after a speech by Federal Reserve Chair Yellen. It was the second straight day of strong gains for the loonie after much weaker-than-expected U.S. jobs data on Friday cut expectations for Fed rate hikes. Canadian dollar-implied volatility, which traders use to price options on the currency, has dropped since Friday's U.S. jobs data. For three-month options, implied volatility was at 9.2 percent, its lowest since January. "When you get a sea change in market sentiment on something as powerful as the course of U.S. interest rates you are going to have a huge effect," said Michael Goshko, corporate risk manager at Western Union Business Solutions. Yellen said that interest rate hikes are likely on the way but stressed that surprises could emerge that could change her expectations for rates. In the near term markets will probably see a "stronger impetus" to buy commodity currencies such as the Canadian dollar as the threat recedes of Fed rate hikes and the U.S. dollar weakens, but a "down shift" in global growth would reduce demand for commodities and weigh on the loonie, said Goshko. U.S. crude prices settled up $1.07 at $49.69, lifted by supply worries. The Canadian dollar ended at C$1.2807 to the greenback, or 78.08 U.S. cents, stronger than Friday's close of C$1.2943, or 77.26 U.S. cents. The currency's weakest level of the session was C$1.2981, while it touched its strongest since May 12 at C$1.2806. Speculators have raised bullish bets on the Canadian dollar, Commodity Futures Trading Commission data showed on Friday. Canadian employment data for May is awaited at the end of the week. It may show "the first taste of wildfire-driven volatility," BMO Capital Markets said in a research note. The Bank of Canada has said it expects damage from the wildfires in Alberta to shave 1.25 percentage points off economic growth in the second quarter. Canadian government bond prices were lower across the maturity curve, with the two-year price down 7.5 Canadian cents to yield 0.547 percent and the benchmark 10-year falling 57 Canadian cents to yield 1.238 percent. On Friday, the 10-year yield hit its lowest in nearly two months at 1.175 percent. (Reporting by Fergal Smith; Editing by Dan Grebler)
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