TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart by the most in more than two months on Wednesday after the Bank of Canada left interest rates on hold but boosted expectations for a hike at its next policy meeting in July.
The central bank left its benchmark interest rate at 1.25 percent, as expected, but dropped cautious language about future rate moves in a signal that higher borrowing costs are on the way.
“The currency strengthened on the less cautious message from the Bank of Canada, which has firmed up expectations for a July rate hike,” said Daniel Katzive, head of FX strategy North America at BNP Paribas.
The Bank of Canada has hiked three times since last summer. Chances of further tightening in July jumped to 64 percent from less than 50 percent before the announcement, the overnight index swaps market indicated. BOCWATCH
“We think that continued tightening from the Bank of Canada effectively reinforces the range in USD-CAD, which we expect to be centered around 1.28,” Katzive said.
At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading 1.1 percent higher at C$1.2876 to the greenback, or 77.66 U.S. cents, its biggest gain since March 21.
The currency, which on Tuesday touched a more than two-month low at C$1.3047, notched its strongest since May 24 at C$1.2837.
The price of oil, one of Canada’s major exports, rebounded from a four-day slump as Russia’s central bank expressed caution on plans to boost oil supply.
U.S. crude oil futures CLc1 settled 2.2 percent higher at $68.21 a barrel.
The U.S. dollar .DXY fell against a basket of major currencies after reports that Italy’s biggest party would make a renewed attempt to form a coalition government and end months of political turmoil helped the euro recover some recent lost ground.
Canada’s current account deficit widened to C$19.50 billion in the first quarter, the third largest ever, thanks to a growing international trade gap in goods, Statistics Canada said.
Canada will “respond appropriately” to any U.S. steel and aluminum tariffs, Foreign Minister Chrystia Freeland said, less than two days before the punitive measures are due to kick in.
Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasury debt. The 10-year CA10YT=RR declined 55 Canadian cents to yield 2.253 percent.
On Tuesday, the 10-year yield touched its lowest since April 11 at 2.165 percent.
Reporting by Fergal Smith