C$ notches big weekly gain on hawkish turn from central bank

TORONTO (Reuters) - The Canadian dollar firmed on Friday to finish its strongest week against its U.S. counterpart in 18 months, helped by an uptick in oil prices, which added support after signals from the Bank of Canada that higher interest rates lie ahead.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

The gap between Canadian and U.S. bond yields narrowed, with the 2-year spread recording its smallest gap since Feb. 24.

Chances of a rate increase by December have surged to 90 percent from less than one-in-four before stronger-than-expected jobs data one week ago. BOCWATCH

Since then, the central bank’s top two officials have said that rate cuts put in place in 2015 had largely done their work, and the bank would assess whether rates need to be kept at near-record lows.

“Unquestionably, the Bank of Canada has shifted to a hawkish stance, but we don’t have a clear indication on the timeline on when they are considering hiking,” said Adam Button, a currency analyst at ForexLive in Montreal.

At 4 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3221 to the greenback, or 75.64 U.S. cents, up 0.4 percent. The currency traded in a range of C$1.3222 to C$1.3272.

It touched its strongest level in 3-1/2 months on Wednesday at C$1.3165. For the week, it notched a 1.9 percent advance, its biggest since the first week of 2016.

Prices of oil, one of Canada’s major exports, bounced up off the year’s lows, but crude posted its fourth weekly decline on persistent concerns about global oversupply.

Speculators cut bearish bets on the Canadian dollar for a third straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions fell to 88,595 contracts as of June 13 from 94,501 a week earlier. In May, net short positions reached a record high 99,109 contracts.

“Speculators were dead wrong on the Canadian dollar and they’re clearing out,” ForexLive’s Button said.

Foreign investment in Canadian securities slowed in April as investors scooped up bonds but sold their equities holdings, data from Statistics Canada showed.

In other domestic data, lending to small businesses picked up in April, suggesting growth in the broader economy was gaining momentum.

Canadian government bond prices were marginally higher across the yield curve, with the two-year CA2YT=RR up 2.5 Canadian cents to yield 0.899 percent and the 10-year CA10YT=RR adding 6 Canadian cents to yield 1.524 percent.

On Thursday, the 2-year yield touched its highest level in nearly 2-1/2 years at 0.937 percent.

Additional reporting by Fergal Smith; Editing by Bernadette Baum and Leslie Adler