February 28, 2011 / 3:39 PM / in 6 years

GDP data lifts Canadian dollar to 3-1/2 year high; eyes on BoC

TORONTO (Reuters) - Canada's dollar jumped to its highest level against the U.S. dollar since November 2007 on Monday after fourth-quarter GDP data topped expectations and backed predictions that the Bank of Canada will resume interest rate hikes in the first half of the year.

Annualized GDP growth in the quarter was 3.3 percent, boosted by surging exports and strong consumer spending, Statistics Canada said.

Statscan also revised third-quarter GDP growth to 1.8 percent from 1.0 percent. Economists polled by Reuters had expected annualized growth of 3.0 percent in the fourth quarter.

Bank of Canada Governor Mark Carney had conceded earlier this month that the bank's January forecast of 2.3 percent growth in the fourth quarter was likely short of the mark, suggesting the export strength was a surprise.

"It's certainly above market expectations, but more importantly above the BoC's expectations," said Jonathan Basile, economist at Credit Suisse in New York.

The currency rose as high as C$0.9710 to the U.S. dollar, or $1.0299, its firmest level since November 2007.

It finished mildly off the session high at C$0.9714 to the U.S. dollar, or $1.0294, up three-quarters of a cent from Friday's North American finish of C$0.9787 to the U.S. dollar, or $1.0218.

Few technical barriers stood in the currency's path as it surged to the highest levels reached before the global financial crisis.

A second economic report also offered support to the currency, with higher exports helping narrow Canada's current fourth-quarter account deficit.

EYES ON THE BOC

The GDP figures come one day ahead of a scheduled Bank of Canada policy announcement, but analysts see little chance of the central bank raising interest rates on Tuesday morning.

Short-dated government bonds fell steeply, responding to evidence of momentum in Canada's economic recovery, which could increase the chances of interest rate hikes later this year. The interest rate-sensitive two-year bond dropped 12 Canadian cents to yield 1.842 percent.

"Expectations for Bank of Canada tightening has moved forward because of the strong GDP report, but it's not going to affect (the rate decision) tomorrow," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.

Dong said the overnight index swaps market suggests the May 31 policy-setting date is the most likely time that the Bank of Canada will take its key rate up 25 basis points from the current 1 percent, which matches a Reuters poll from February 24.

Market watchers now expect stronger language on the economic outlook in the Bank of Canada's commentary on Tuesday's rate decision, which may lay the groundwork for an interest rate increase in either April or May.

"I think we will hear a more two-handed statement from the Bank of Canada tomorrow, which could set the stage for a rate hike in coming months," said Sal Guatieri, senior economist at BMO Capital Markets.

"(The GDP data) is moving in the right direction, consistent with an economy that's picking up steam."

But not all market watchers were convinced that the Bank of Canada would move quickly on rates, particularly as the Canadian dollar is now much higher than the parity level the central bank had assumed in its last Monetary Policy Report in January.

"I think it's a good report, stands up to scrutiny, but it still, in my mind, doesn't change anything for the Bank of Canada," said Derek Holt, economist at Scotia Capital.

"I think they're likely to say that we've seen a bit of growth momentum of late, but we're more concerned about the developments in global commodities, downside risks to global growth, compared to the last statement."

Additional reporting by Solarina Ho; editing by Rob Wilson

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