December 5, 2012 / 1:17 PM / 6 years ago

Canadian dollar rallies for second day on hawkish Bank of Canada

TORONTO (Reuters) - The commodity-linked Canadian dollar hit a more than one-week high against the U.S. unit Wednesday after the Bank of Canada reiterated it will need to tighten monetary policy over time, and on signs China’s economic recovery was on track.

Canada’s central bank held its overnight lending rate steady on Tuesday at 1 percent, as expected. The bank has kept the rate unchanged for more than two years, the longest period of Bank of Canada inactivity since the early 1950s.

But the bank’s unwavering opinion that it may need to hike interest rates, not cut them, boosted confidence in the currency, prompting it to outperform most other majors, including the euro.

“There’s an element of catch-up perhaps at play here because people were obviously a little mindful ahead of the bank yesterday and the fact that there wasn’t any change in stance or tone I think has just encouraged a little bit of residual CAD strength to come back in,” said Jeremy Stretch, head of FX strategy at CIBC World Markets in London.

Meanwhile, Chinese Communist Party chief Xi Jinping said the country will maintain its fine-tuning of economic policies in 2013 to ensure stable economic growth, sparking a broad rally in equities, commodities and growth-related currencies.

At 8:00 a.m. (1500 GMT), the Canadian dollar stood at C$0.9918 versus the greenback, or $1.0083, firmer than Tuesday’s North American session close at C$0.9932, or $1.0068. Earlier, the currency touched C$0.9910, or $1.0091, its strongest level since November 27.

Stretch said a close stronger than the 100-day moving average at C$0.9913 could fuel a near-term Canadian dollar rally to the C$0.9875 area.

Economists and currency strategists polled by Reuters expect the Canadian dollar to strengthen against its U.S. counterpart over the next year, with a recovering global economy and a possible Bank of Canada interest rate increase providing support. <CAD/POLL>

Over six months, the survey saw the currency strengthening to C$0.9800, or $1.0204, and holding at that level a year from now. <CAD/POLL>

However, investors are still on edge as talks between the White House and Congress to avoid year-end tax hikes and spending cuts showed little progress.

Canadian bond prices were little changed across the curve. The two-year bond was off half a Canadian cent to yield 1.062 percent, and the benchmark 10-year bond was down 5 Canadian cents to yield 1.700 percent.

Editing by Bernadette Baum

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