January 3, 2019 / 9:23 PM / 2 years ago

CANADA FX DEBT-C$ notches 2-week high as U.S. interest rate edge fades

 (Adds strategist quote, details throughout; updates prices)
    * Canadian dollar rises 0.7 percent against the greenback
    * Loonie touches its strongest since Dec. 22 at 1.3470
    * Canada's 10-year yield hits its lowest in more than 16
    * Canada-U.S. 2-year spread narrows by 4.3 basis points

    By Fergal Smith
    TORONTO, Jan 3 (Reuters) - The Canadian dollar strengthened
to a two-week high against its U.S. counterpart on Thursday,
boosted by higher oil prices and a narrower gap between U.S. and
Canadian interest rates.
    The loonie's gains came ahead of the release on Friday of
Canada's employment report for December, which could help guide
expectations for next week's interest rate decision from the
Bank of Canada.
    Expectations of further interest rate increases have
crumbled after the central bank said last month that it was
worried about the impact on the economy of a sharp drop in oil
prices since October. But expectations have also faded for
further tightening from the U.S. Federal Reserve.
    "The fade in Fed expectations is a bit more aggressive than
the fade in Bank of Canada rate expectations," said Eric
Theoret, a currency strategist at Scotiabank.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 4.3 basis points to a spread of 61.8
basis points in favor of the U.S. bond, its narrowest since Nov.
    At 3:58 p.m. (2058 GMT), the Canadian dollar          was
trading 0.7 percent higher at 1.3480 to the greenback, or 74.18
U.S. cents. The currency, which fell 7.8 percent in 2018,
touched its strongest level since Dec. 20 at 1.3470.
    The price of oil, one of Canada's major exports, rose in 
volatile trade, drawing support from signs that Saudi Arabia is
cutting crude output. U.S. crude oil futures        settled 1.2
percent higher at $47.09 a barrel.             
    The U.S. dollar        declined against a basket of major
currencies as the yen surged. Investors were attracted to the 
perceived safety of the Japanese currency after a surprise
revenue warning from Apple Inc          exacerbated concerns
about a Chinese and global economic slowdown.             
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 13 Canadian cents in
price to yield 1.769 percent and the 10-year             rising
64 Canadian cents in price to yield 1.828 percent.
    The 10-year yield hit its lowest intraday level since August
2017 at 1.814 percent.

 (Reporting by Fergal Smith; Editing by Dan Grebler)
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