March 13, 2017 / 9:31 PM / 4 months ago

CANADA FX DEBT-C$ strengthens as yield gap narrows

3 Min Read

 (Adds analyst quotes, details; updates prices)
    * Canadian dollar ended at C$1.3444, or 74.38 U.S. cents
    * Bond prices lower across a steeper yield curve
    * 10-year yield touches its highest since June 2015

    By Fergal Smith
    TORONTO, March 13 (Reuters) - The Canadian dollar rose on
Monday against its U.S. counterpart as a narrower gap between
Canadian and U.S. yields offset lower prices for oil, one of
Canada's major exports.
    The gap between Canadian and U.S. 2-year yield narrowed by
1.5 basis points to a spread of -50.1 basis points. Earlier in
March it had touched its widest gap since January 2016 at -55.2
basis points. The narrower gap reduces investor incentive to
hold higher yielding U.S. dollars.
    "A little bit of shrinking in the U.S. dollar's yield
advantage and I would point that back to Friday's (Canadian)
payrolls number," said Greg Anderson, global head of foreign
exchange strategy at BMO Capital Markets.
    The 15,300 increase in Canadian jobs in February easily
topped economists' expectations and extended the labor market's
recent strong run.             
    Data on Friday also showed a robust pace of hiring by U.S.
employers, supporting expectations for a Federal Reserve
interest rate hike on Wednesday.             
    "It is not like the Bank of Canada is going to tighten to
follow the Fed, but if (Bank of Canada Governor Stephen) Poloz
comes out and is dovish ... well nobody is going to believe the
dovishness," Anderson said.
    The chances of a Bank of Canada rate hike this year rose to
more than 50 percent, data from the overnight index swaps market
showed. It was less than 30 percent after the Bank of Canada
left rates on hold at the start of the month and focused on the
"significant uncertainties" facing the economy.           
    U.S. crude        prices settled 9 cents lower at $48.40 a
barrel after touching three-month lows, pressured by swelling
U.S. supplies.             
    The Canadian dollar          ended at C$1.3444 to the
greenback, or 74.38 U.S. cents, stronger than Friday's close of
C$1.3463, or 74.28 U.S. cents.
    The range for the currency was C$1.3431 to C$1.3473.
    Speculators trimmed bullish bets on the Canadian dollar,
data from the Commodity Futures Trading Commission and Reuters
calculations showed on Friday. But net long positions in the
loonie held near the highest since February 2013.             
    Those investors are "vulnerable to repositioning over the
next two weeks," said Anderson.
    Canadian government bond prices were lower across the yield
curve, with the two-year            down 6 Canadian cents to
yield 0.875 percent and the 10-year             falling 49
Canadian cents to yield 1.871 percent.
    The 10-year yield touched its highest since June 2015 at
1.876 percent.

 (Reporting by Fergal Smith; Editing by Chizu Nomiyama and
Sandra Maler)
  
 

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