TORONTO (Reuters) - The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday after a speech by Bank of Canada Governor Stephen Poloz boosted expectations for further interest rate hikes early next year.
The loonie rallied as much as 1.1 percent after Poloz said that the central bank was increasingly confident the economy will need less stimulus over time.
The central bank raised rates twice this year but left its benchmark rate steady at 1 percent last week as it struck a more dovish tone than expected after strong employment data.
“Traders like nothing more than a trend to jump on top of before year end, to put a little cherry on their cake,” said Michael Goshko, corporate risk Manager at Western Union Business Solutions.
The break below C$1.2780 in USD-CAD prompted traders who had been short Canadian dollars to cut their losses, Goshko said.
Chances of a rate hike by January edged up to 32 percent, while the implied probability of a tightening by March climbed to 68 percent from 61 percent before the speech.
At 4 p.m. EDT (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2755 to the greenback, or 78.40 U.S. cents, up 0.5 percent.
The currency’s weakest level of the session was C$1.2866, while it touched its strongest since Dec. 6 at C$1.2713.
Higher prices of oil, one of Canada’s exports, added to support for the loonie.
U.S. crude futures CLc1 settled 0.8 percent higher at $57.04 a barrel after a pipeline outage in Britain continued to support prices.
Resales of Canadian homes rose 3.9 percent in November from October, the fourth straight monthly rise, but the momentum may not last as stricter mortgage rules take effect in January, the Canadian Real Estate Association said.
Statistics Canada said Canadian household debt as a share of income reached a record high of 171.1 percent in the third quarter. The report is likely to reinforce concerns that consumers could run into trouble as interest rates rise.
Canadian government bond prices were lower across a much flatter yield curve, with the two-year CA2YT=RR down 12 Canadian cents to yield 1.571 percent and the 10-year CA10YT=RR declining 16 Canadian cents to yield 1.863 percent.
The gap between the 2- and 10-year yields narrowed by 4.7 basis points to a spread of 29.2 basis points, its narrowest since January 2008.
Reporting by Fergal Smith; Editing by Lisa Von Ahn and Susan Thomas