TORONTO (Reuters) - The Canadian dollar raced to a one-year high on Friday as domestic jobs data zoomed past forecasts and sparked chatter about whether the Bank of Canada will be forced to raise rates sooner than expected.
The currency shot to C$1.0411 to the U.S. dollar, or 96.05 U.S. cents, its highest level since September 2008, after data showed the economy created 30,600 jobs in September, six times more than expected.
Also helping to power the currency’s latest rally was talk about whether the central bank may now opt to move early on interest rates and give up its conditional pledge to keep rates at their historic low of 0.25 percent at least until mid-2010.
“It’s all on the back of the strong employment report which showed that Canada is creating jobs,” said Sal Guatieri, senior economist at BMO Capital Markets.
“It likely suggests the Bank of Canada will move on rates ahead of the Federal Reserve, albeit not for another year.”
The Canadian currency finished at C$1.0444 to the U.S. dollar, or 95.75 U.S. cents, up from C$1.0522 to the U.S. dollar, or 95.04 U.S. cents, at Thursday’s close. The Canadian unit is up 3.6 percent for the week.
Talk of rate hikes ramped up this week after the Reserve Bank of Australia raised its interest rate and became the first central bank in the Group of 20 nations to tighten monetary policy as the financial crisis abates.
However, analysts said the currency’s rally, which makes life tougher for Canadian exporters, has had the same braking effect on the economy as higher rates. As a consequence, the Bank of Canada still has latitude to hold rates steady, giving it flexibility, especially if the United States, Canada’s main trading partner, fails to sustain its own recovery.
Still, the rate speculation, combined with a recent string of reassuring economic reports on both sides of the border helped propel commodity prices earlier this week, with oil shooting above $72 a barrel, while gold hit a record high above $1,060 an ounce.
As well, two Bank of Canada surveys also showed businesses were more upbeat in the third quarter about sales and credit, but continue to postpone major investments because they expect the recovery to be very gradual.
“The market is looking at Canada recovering from the recession faster than the States and other countries in the world,” said David Bradley, director of foreign exchange trading, Scotia Capital.
“The natural interest would be to buy Canadian dollars on the back of that.”
Domestic bond prices weakened as the market priced in an improving economic outlook and speculation about an earlier than anticipated Bank of Canada rates move, said Guatieri.
The market also followed the bigger U.S. Treasury market where debt prices plunged on fears of monetary tightening after comments by the Federal Reserve.
The two-year bond sank 41 Canadian cents to C$99.05 to yield 1.707 percent, while the 30-year bond fell C$1.40 Canadian cents to C$117.20 to yield 3.969 percent.
The Canadian market notched a mixed performance against U.S. Treasury bonds, with the 2-year Canadian yield about 73 basis points above its U.S. counterpart, from around 62 basis points on Thursday.
The 30-year Canadian yield was about 26 basis points below the U.S., versus 19 basis points below on Thursday.