August 1, 2018 / 7:45 PM / 2 years ago

CANADA FX DEBT-C$ climbs to 7-week high on signs of NAFTA progress

 (New throughout)
    * Canadian dollar at C$1.2996, or 76.95 U.S. cents
    * Price of U.S. oil falls 1.6 percent
    * Bond prices lower across a steeper yield curve
    * 10-year yield touches its highest in more than two months

    By Fergal Smith
    TORONTO, Aug 1 (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.
    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         
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.           
    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        settled 1.6 percent lower at $67.66 a
    Canadian government bond prices were lower across a steeper
yield curve. The 10-year             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)
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