TORONTO (Reuters) - The Canadian dollar peaked to its firmest level in a year against its U.S. counterpart on Friday as a "perfect storm" of risk appetite and stronger-than-expected domestic employment data pushed the currency through the C$0.98 level.
The Canadian economy added 34,300 jobs last month, topping all expectations of analysts surveyed by Reuters. Canada has recouped all the jobs lost in the recession, and employment stands 176,600 higher than in August 2011, with most of the increases in full-time positions.
"It's likely to support the already hawkish stance of the Bank of Canada. We've had a slew of some disappointing domestic data recently, so this is a positive development for the Canadian dollar," said Camilla Sutton, chief currency strategist at Scotiabank.
By contrast, in the United States jobs growth slowed sharply in August, with nonfarm payrolls increasing less than expected. The weak report strengthens the case for the Federal Reserve to pump more money into the sputtering economy.
Fed Chairman Ben Bernanke has said the U.S. central bank is seriously considering a third round of monetary policy easing to help counter the "grave" stagnation of the U.S. labor market.
"The surprisingly strong Canadian employment numbers relative to the disappointing U.S. numbers gave Canada a boost and on top of that, the weak U.S. numbers prompted more speculation of QE3," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.
The currency finished its North American session at C$0.9782 against the U.S. dollar, or $1.0223, from Wednesday's close of C$0.9828, or $1.0175. Earlier, it touched C$0.9766, or C$1.0240, matching the level hit on September 19, 2011.
The Canadian dollar had already been buoyed by Thursday's announcement by the European Central Bank that it will launch a new and potentially unlimited bond-buying program to lower borrowing costs for struggling euro zone countries.
"It's kind of a perfect storm for Canada of good domestic news and the right international environment," said Adam Cole, global head of FX strategy at Royal Bank of Canada in London.
Cole said the currency may lose some momentum as it approaches the C$0.9700 level, adding there's not much support after that until the currency reaches the mid-C$0.90's level.
The currency is unlikely to see parity in the near term, he said. "I think you'd have to see a wholesale sell-off in risk to get that."
While the situation in Europe appears contained in the near term, analysts say there are still a number of hurdles ahead, the next one being the German constitutional court's ruling on the euro zone bailout fund scheduled for September 12.
Market watchers are also waiting to see when the Fed might announce a fresh round of stimulus. Reitzes said markets have priced in action before the end of the year, but have not fully priced in monetary easing as early as next week, adding the loonie could soar further if the Fed decides on stimulus moves at their next meeting on September 12-13.
"You really can't get much further from where we are now, without getting officials concerned about the strength in the dollar," Reitzes cautioned.
Canadian government bonds were higher across the curve, with the two-year bond down 3.5 Canadian cents to yield 1.183 percent and the benchmark 10-year bond slipping 14 Canadian cents, yielding 1.854 percent.
Editing by James Dalgleish