CANADA FX DEBT-C$ hits 9-month high on rate outlook, oil rally

Tue Apr 19, 2016 4:55pm EDT
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(Adds strategist comment, details on Bank of Canada, technical
    * Canadian dollar settles at C$1.2660, or 78.99 U.S. cents
    * Loonie touches its strongest since July 7 at C$1.2630
    * Bond prices lower across the maturity curve

    By Alastair Sharp
    TORONTO, April 19 (Reuters) - The Canadian dollar surged on
Tuesday to a nine-month high against its U.S. counterpart,
breaking through a key technical level on support from a
convergence in the interest-rate outlook for the two countries
and rising oil prices.
    A strike by Kuwaiti oil workers pushed oil prices up 3
percent and helped boost commodity-linked currencies such as the
loonie, as Canada's currency is colloquially known. 
    The Canadian dollar settled at C$1.2660 to the
greenback, or 78.99 U.S. cents, much stronger than Monday's
official close of C$1.2797, or 78.14 U.S. cents.
    That close breached a roughly 38 percent retracement of the
U.S. dollar's rally from 2011 through January this year.
    At one point it touched C$1.2630, its strongest level since
July 6.
    "There's momentum to this move in dollar/Canada, and it
looks like it's going to continue in the absence of any guidance
otherwise from the Bank of Canada," said Jack Spitz, managing
director of foreign exchange at National Bank Financial.
    Last week, the central bank warned the country's improving
economy faced downside risks, including a stronger currency that
could drag on non-commodity exports, although it held interest
rates steady and raised growth forecasts. 
    Governor Stephen Poloz did not update that outlook in
response to questions at a parliamentary committee on Tuesday.
    The tripping of stops below C$1.27 fueled the appreciation,
Spitz said, and the market will now be eyeing light resistance
at C$1.2580 and the symbolic C$1.25/80 U.S. cents level before
turning to the lows of May last year around C$1.1920.
    "Dovishness from the Fed and the stripping away of rate cuts
at the Bank of Canada means that interest rates are converging,"
Spitz said, pointing to a halving in the spread between 2-year
Canadian and U.S. bond yields in the past month.
    The implied probability of a Bank of Canada hike this year
has risen above 10 percent, data from overnight index swaps
showed. At the start of March, it had implied a more than 50
percent chance of a cut. 
    Meanwhile, investors are skeptical the U.S. Federal Reserve 
can tighten in the face of paltry global demand.
    Canadian government bond prices were lower across the
maturity curve, with the two-year price down 3.5
Canadian cents to yield 0.618 percent and the benchmark 10-year
 off 22 Canadian cents to yield 1.302 percent. 
    The 10-year yield touched its highest since March 16 at
1.353 percent.

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
David Gregorio)