September 1, 2017 / 8:36 PM / 3 years ago

CANADA FX DEBT-C$ notches 2-year high as rate hike chances climb

 (Adds analyst quote and background details; updates prices)
    * Canadian dollar at C$1.2385, or 80.74 U.S. cents
    * Touches its strongest level since June 2015 at C$1.2340
    * Bond prices lower across the yield curve
    * Chances of a rate hike next week reach nearly 50 percent

    By Fergal Smith
    TORONTO, Sept 1 (Reuters) - The Canadian dollar posted a
2-year high against its U.S. counterpart on Friday and domestic
bond yields rose, as investors headed into the long weekend
bracing for a possible interest rate hike next week from the
Bank of Canada.
    Markets had expected the Bank of Canada to wait until
October before raising rates again, after hiking in July for the
first time in nearly seven years.
    But expectations for a hike at the Sept. 6 interest rate
announcement have ramped up after data on Thursday showed
Canada's economy expanded in the second quarter at its fastest
pace in nearly six years.                 
    The overnight index swaps market indicates that chances of a
hike next week have reached nearly 50 percent, up from around 20
percent before Thursday's GDP report.           
    "The likelihood of a Bank of Canada hike is really what is
driving markets," said Karl Schamotta, director global markets
strategy at Cambridge Global Payments.
    The Bank of Canada is likely to leave interest rates
unchanged at its Sept. 6 meeting and wait until October to raise
them, a Reuters poll released on Friday showed.             
    Speculators have increased bullish bets on the loonie, data
from the U.S. Commodity Futures Trading Commission and Reuters
calculations showed.
    Canadian dollar net long positions edged up to 53,167
contracts as of Aug. 29 from 51,099 a week earlier.
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading at C$1.2385 to the greenback, or 80.74 U.S. cents, up
0.8 percent.
    The currency touched its strongest since June 2015 at
C$1.2340. It has rallied nearly 2 percent since Wednesday and
ended the week up 0.8 percent.
    Domestic bond yields climbed.
    "People are not feeling comfortable holding Canadian bonds
into the long weekend," with the Bank of Canada rate
announcement following shortly after on Wednesday, said Andrew
Kelvin, senior rates strategist at TD Securities.
    Canadian markets will be closed on Monday for Labour Day.
    Canada's 10-year bond             fell 57 Canadian cents to
yield 1.916 percent.
    U.S. Treasury yields also rose as strong manufacturing data
offset a weaker than expected jobs report.             
    The pace of growth in the Canadian manufacturing sector
dipped in August.                 
    Still, the gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 4.9 basis points to stop just short of
    U.S. crude oil        futures settled 6 cents higher at
$47.29 a barrel.             

 (Reporting by Fergal Smith; Editing by Paul Simao and Grant
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