Canadian dollar rallies as business optimism backs further rate hikes

TORONTO (Reuters) - The Canadian dollar strengthened to its highest in five days against its U.S. counterpart on Monday, after a quarterly business survey by the Bank of Canada supported bets for another interest rate hike from the central bank as soon as next week.

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

Canadian business optimism remained at near-record levels in the third quarter as companies reported rising pressure on capacity, labor and prices amid signs of stronger sales, the Bank of Canada said.

The central bank has hiked interest rates four times since July 2017 to leave its policy rate at 1.50 percent. Chances of another hike at the Oct. 24 announcement stayed at nearly 90 percent after the data, the overnight index swaps market indicated. BOCWATCH

“It supports the outlook for higher rates in Canada and particularly toward the end of this month,” said Shaun Osborne, chief currency strategist at Scotiabank. “The fact that we got such a positive read, particularly on business investment, before there was clarity on the trade outlook, I think was quite encouraging.”

All the interviews were carried out before Canada and the United States struck a deal on Sept. 30 on a new trade pact with Mexico.

At 3:18 p.m. (1918 GMT), the Canadian dollar CAD=D4 was trading 0.2 percent higher at 1.2990 to the greenback, or 76.98 U.S. cents. The currency touched its strongest level since Oct. 10 at 1.2955.

Last week, the loonie declined 0.6 percent as worries over higher bond yields and the impact of trade tariffs contributed to volatility in global financial markets.

Still, speculators have cut bearish bets on the Canadian dollar to the lowest since March, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. As of Oct. 9, net short positions had decreased to 12,145 contracts from 18,484 a week earlier.

The price of oil, one of Canada’s major exports, was supported by geopolitical tension over the disappearance of a Saudi journalist that has stoked worries about supplies from the world’s top crude exporter.

U.S. crude oil futures CLc1 settled 0.6 percent higher at $71.78 a barrel.

Resales of Canadian homes dipped 0.4 percent in September from August, the first decline since April, the Canadian Real Estate Association said.

Canadian government bond prices were lower across a flatter yield curve, with the 10-year CA10YT=RR falling 5 Canadian cents to yield 2.506 percent.

Reporting by Fergal Smith; Editing by Susan Thomas and Peter Cooney