June 20, 2019 / 8:40 PM / 3 months ago

UPDATE 1-CANADA FX DEBT-Loonie climbs to 3-month high on oil rally, dovish Fed

    * Canadian dollar rises 0.7% against the greenback
    * Loonie touches strongest level since March 1 at 1.3151
    * Price of oil increases 5.4%
    * Canada-U.S. 2-year spread at narrowest since February 2018

 (Adds portfolio manager quotes and details throughout, updates
prices)
    By Fergal Smith
    TORONTO, June 20 (Reuters) - The Canadian dollar
strengthened to a three-month high against its U.S. counterpart
on Thursday as oil prices surged and the greenback was pressured
by the prospect of interest rate cuts by the Federal Reserve.
    The U.S. dollar        sank against a basket of currencies,
posting its biggest two-day drop in a year a day after the
Federal Reserve signaled it was ready to cut interest rates as
early as next month.             
    The price of oil, one of Canada's major exports, jumped
after Iran shot down a U.S. military drone, raising fears of a
military confrontation between Tehran and Washington. U.S. crude
oil futures        settled 5.4% higher at $56.65 a barrel.
            
    In addition to higher oil prices and the prospect of Fed
rate cuts, the loonie has benefited from data on Wednesday
showing that the annual rate of Canadian inflation climbed to a
seven-month high in May.             
    "We have got three forces at play ... all working in the
same direction, pushing the Canadian dollar to very high
levels," said Hosen Marjaee, a senior portfolio manager at
Manulife Asset Management.            
    At 3:51 p.m. (1951 GMT), the Canadian dollar          was
trading 0.7% higher at 1.3190 to the greenback, or 75.82 U.S.
cents. The currency touched its strongest intraday level since
March 1 at 1.3151.
    Gains for the loonie came as Mexican President Andres Manuel
Lopez Obrador said it was now up to Canada and the United States
to ratify the United States-Mexico-Canada Agreement (USMCA)
after Mexico's Senate approved the trade deal on Wednesday.
    Canada sends about 75% of its exports to the United States,
so its economy could benefit if all three countries ratify the
new North American trade pact.
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 2.5 Canadian
cents to yield 1.404% and the 10-year             falling 29
Canadian cents to yield 1.454%.
    The gap between Canada's two-year yield and its U.S.
equivalent narrowed by 4 basis points to a spread of 33.6 basis
points in favor of the U.S. bond, its smallest gap since
February last year.
    Canada lost 16,000 jobs in May, the first decline in three
months, as hiring fell in the construction sector, according to
a report from ADP, a human resources company.             

 (Reporting by Fergal Smith; Editing by Chizu Nomiyama and Peter
Cooney)
  
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