April 15, 2015 / 9:04 PM / 2 years ago

CANADA FX-C$ surges to 3-month high after central bank's more bullish signal

(Updates throughout with details, comment from USForex, market reaction)

* Canadian dollar ends at C$1.2300, or 81.30 U.S. cents

* C$ hits strongest level since January rate cut

* C$ has biggest one-day gain since March 18

* Bond prices lower across the maturity curve

By Solarina Ho

TORONTO, April 15 (Reuters) - The Canadian dollar powered higher on Wednesday after the Bank of Canada talked down the probability of another interest rate cut, with the currency hitting its strongest level against the greenback since the bank's surprise rate cut in January.

Bank Governor Stephen Poloz reiterated his view that the impact of the oil-price crash on Canada's oil-heavy economy will have been most severe in the first part of the year and that the bank's 25-basis-point January cut, as well as more robust U.S. demand, will help non-energy exports and labor markets strengthen.

"Probably the ... most positive (comment) was the fact that some of the economic weakness we've seen is front-loaded and that they are expecting the economy to be on a pretty good growth trajectory for the remainder of the year," said Lennon Sweeting, currency strategist at USForex.

"Market participants are looking to take profit on what's been a very long U.S. dollar rally and this is just another one of those instances where the opportunity presented itself."

The Canadian dollar, which was outperforming all of its counterparts, finished the session at C$1.2300 to the U.S. dollar, or 81.30 U.S. cents. That was a more than 1.5 percent gain, or nearly two Canadian cents stronger than Tuesday's finish of C$1.2490, or 80.06 U.S. cents.

Earlier in the session, the loonie touched C$1.2280, or 81.43 U.S. cents, its strongest level since Jan. 21, when the Bank of Canada blindsided markets with its rate cut. Wednesday's move was also the loonie's biggest one-day gain since mid-March.

Sweeting said the Canadian dollar's surge is temporary, however, noting the bank's view that a weaker currency is what will drive the economy in the coming months.

"I would definitely suggest that next time Poloz speaks, we all better be ready for a big pullback on the Canadian dollar," he said. "I don't think his intention was to move this into the C$1.23s."

Before the central bank statement, the loonie had been as weak as C$1.2570, or 79.55 U.S. cents.

Canadian government bond prices were lower across the maturity curve, with the two-year off 9 Canadian cents to yield 0.562 percent and the benchmark 10-year sliding 30 Canadian cents to yield 1.348 percent.

The Canada-U.S. two-year bond spread was 5.8, while the 10-year spread was -54.5. (Editing by Lisa Von Ahn and Peter Galloway)

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