December 5, 2012 / 10:08 PM / 5 years ago

Canada dollar buoyed by China hopes, hawkish Bank of Canada

TORONTO (Reuters) - Canada’s dollar touched a more than one-week high against its U.S. counterpart on Wednesday as investor sentiment remained upbeat a day after the Bank of Canada’s statement on interest rates and signs that China’s economic recovery was on track.

Canada’s central bank held its overnight lending rate steady on Tuesday at 1 percent, as expected, but the bank’s unwavering opinion that it may need to eventually hike interest rates, not cut them, boosted confidence in the currency, and it outperformed most other majors, including the euro.

“We’re still seeing a bounce related to the hawkish tone in the Bank of Canada statement yesterday. That’s helping to support Canadian dollar sentiment,” said Karl Schamotta, a Calgary-based senior market strategist with Western Union Business Solutions.

The prospect of higher interest rates tends to support currencies by attracting international capital flows.

Meanwhile, new Chinese Communist Party chief Xi Jinping said the world’s second-largest economy 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.

The Canadian dollar finished the session at C$0.9917 versus the greenback, or $1.0084, firmer than Tuesday’s North American close at C$0.9932, or $1.0068. Earlier, the currency touched C$0.9908, or $1.0093, its strongest level since November 27.

The currency also outperformed the commodity-linked Australian dollar. Earlier this week the Reserve Bank of Australia cut interest rates to a record-matching low of 3 percent after the country’s resource-reliant economy was hit by lower export revenues, government cutbacks and a decelerating mining boom.

“The Bank of Canada certainly looks like the last man standing,” said Schamotta.

The currency remained within its recent narrow range around C$0.9962 and C$0.9906, however, and failed to sustain its move through the 100-day moving average of C$0.9913. A close stronger than that could have fueled a near-term Canadian dollar rally to the C$0.9875 area, said Jeremy Stretch, head of FX strategy at CIBC World Markets in London.

“Looking ahead to the employment numbers on Friday … may well be one caveat which will prevent too aggressive a CAD rally at least until then,” he said, adding that he was expecting a slightly disappointing number below consensus.

Both Canada and the United States will release November employment figures on Friday. Economists expect the United States to have added 93,000 jobs and Canada to have added 10,000 jobs.

“The jobs report will be a huge influence ... I think the key thing there is we’re looking to see if recent stability in jobs will continue in the U.S., and we certainly saw signs of nascent improvement in numbers over the last couple of months,” said Schamotta.

“I do expect overall sentiment to begin slipping here and to continue slipping really, which would pull it back closer to the par mark over the next few days,” he said, but added that he did not expect the currency to substantially break out of its current trading range until the new year.

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.

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 higher across the curve. The two-year bond climbed 2.5 Canadian cents to yield 1.046 percent, and the benchmark 10-year bond gained 6 Canadian cents to yield 1.688 percent.

Additional reporting by Claire Sibonney; Editing by Leslie Adler

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