C$ notches two-month high as Poloz comments support rate hike view

TORONTO (Reuters) - The Canadian dollar strengthened to a two-month high against its U.S. counterpart on Tuesday as comments by Bank of Canada Governor Stephen Poloz supported the view that the central bank could raise interest rates sooner than previously thought.

The interest rates cuts the Bank of Canada made in 2015 have largely done their job as the economy appears to be gathering momentum, the head of the central bank said.

“Poloz today signaled that rates won’t be on hold forever,” said Nick Exarhos, economist at CIBC Capital Markets.

Chances of an interest rate hike this year have surged to 72 percent from just 22 percent before stronger-than-expected jobs data on Friday, data from the overnight index swaps market shows. BOCWATCH

Most of the move came after hawkish comments on Monday from Bank of Canada Senior Deputy Governor Carolyn Wilkins.

Bearish bets on the loonie had held near a record high as of June 6, data from the Commodity Futures Trading Commission and Reuters calculations showed on Friday.

Strengthening of the currency could put pressure on often-leveraged speculators to cover short positions and accelerate any move higher in the currency.

At 9:32 a.m. ET (1332 GMT), the Canadian dollar CAD=D4 was trading at C$1.3228 to the greenback, or 75.60 U.S. cents, up 0.7 percent.

The currency’s weakest level was C$1.3325, while it touched its strongest since April 13 at C$1.3226.

Gains for the loonie came even as prices of oil, one of Canada’s major exports, edged down after OPEC reported an increase in its production for May.

U.S. crude CLc1 prices were down 0.22 percent at $45.98 a barrel.

The U.S. dollar .DXY inched down as traders eyed the start of a two-day Federal Reserve meeting.

Canadian government bond prices were much lower across the yield curve, with the two-year CA2YT=RR down 12.5 Canadian cents to yield 0.911 percent and the 10-year CA10YT=RR falling 58 Canadian cents to yield 1.549 percent.

The 2-year yield touched its highest intraday since January 2015 at 0.914 percent.

Reporting by Fergal Smith; Editing by Nick Zieminski