Canadian dollar climbs to 7-week high on signs of NAFTA progress

TORONTO (Reuters) - The Canadian dollar strengthened to a nearly seven-week high against its U.S. counterpart on Wednesday as the U.S. Federal Reserve left interest rates on hold and officials signaled progress in talks to update the NAFTA trade pact.

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 United States and Mexico are getting close to a deal on the key issue of autos content rules at negotiations to renew the North American Free Trade Agreement, Mexican and Canadian officials said.

There is a belief in the market that progress on autos between the United States and Mexico will bring a NAFTA deal one step closer, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

“Over the last few days that’s what has helped the Canadian dollar a little bit at the margin.”

The Fed kept interest rates unchanged but characterized the economy as strong, keeping the central bank on track to increase borrowing costs in September.

At 3:24 p.m. EDT (1924 GMT), the Canadian dollar CAD=D4 was trading 0.1 percent higher at C$1.2996 to the greenback, or 76.95 U.S. cents. The currency touched its strongest since June 14 at C$1.2975.

The modest gain for the loonie came as data showed that the pace of growth in Canada’s manufacturing sector eased in July but remained at a robust level. The IHS Markit Canada Manufacturing Purchasing Managers’ index (PMI) dipped to a seasonally adjusted 56.9 last month from a survey-record high of 57.1 in June.

“The general level of activity is very good,” Chandler said. “It (the PMI) has a very good correlation with GDP.”

Economists have said that second-quarter economic growth was likely to come in at 3.0 percent on an annualized basis, just above the Bank of Canada’s 2.8 percent forecast.

Money markets expect the central bank to hike interest rates once more this year. BOCWATCH

The price of oil, one of Canada's major exports, was pressured by a surprise increase in U.S. crude stockpiles. U.S. crude oil futures CLc1 settled 1.6 percent lower at $67.66 a barrel.

Canadian government bond prices were lower across a steeper yield curve. The 10-year CA10YT=RR declined 58 Canadian cents to yield 2.378 percent, its highest since May 25.

The gap between the 10-year yield and its U.S. equivalent narrowed by 2.8 basis points to a spread of 62.5 basis points in favor of the U.S. bond.

Reporting by Fergal Smith; editing by Jonathan Oatis