June 27, 2019 / 8:27 PM / 3 months ago

CANADA FX DEBT-C$ climbs to five-month high as yield gap vs U.S. slides

 (Adds portfolio manager quotes and details throughout; updates
prices)
    * Canadian dollar rises 0.2% against the greenback
    * Loonie is on track to gain 3.2% in June
    * Canada-U.S. 2-year spread narrows to less than 30 basis
points
    * Canadian bond prices rally across a flatter yield curve

    By Fergal Smith
    TORONTO, June 27 (Reuters) - The Canadian dollar
strengthened to a near five-month high against the greenback on
Thursday as the additional return on holding U.S. bonds fell to
the lowest in more than one year.
    The gap between Canada's 2-year yield and its U.S.
equivalent, which was 84 basis points in March, narrowed by 1.7
basis points to less than 30 basis points in favor of the U.S.
bond, its smallest differential since February 2018.
    The narrowing in the yield differential comes after the
Federal Reserve shifted from hiking interest rates in December
to signaling last week that it could cut rates as early as July.
    "We haven't seen that in Canada, as far as that pivot to the
dovish side," said Michael Greenberg, a portfolio manager at
Franklin Templeton Multi-Asset Solutions. "At this point Canada
is holding up pretty well."
    Average weekly earnings of non-farm payroll employees rose
by 2.9% in April, the fastest pace since August last year,
adding to evidence that Canada's economy is recovering after a
slow down around the turn of the year.
    Canadian gross domestic product data for April is due on
Friday.
    At 3:44 p.m. (1944 GMT), the Canadian dollar          was
trading 0.2% higher at 1.3102 to the greenback, or 76.32 U.S.
cents. The currency touched its strongest level since Feb. 4 at
1.3092.
    The loonie is on track to gain 3.2% in June, while it has
gained more than 4% since the start of the year, the best
performance among G10 currencies.
    Money markets see about a 40% chance of an interest rate cut
this year by the Bank of Canada, while they expect at least two
rate cuts from the Federal Reserve.           
    Still, Canada is a major exporter of commodities, including
oil, so its economy could be hurt if progress is not reached on
the U.S.-China trade dispute at the G20 summit this weekend.
    If the trade war were to drag on and the Fed cuts interest
rates, then the Bank of Canada would likely ease more than the
market is expecting, Greenberg said.
    U.S. crude oil futures        held on to strong gains over
the past two weeks, settling 0.1% higher at $59.43 a barrel.
            
    Canadian government bond prices were higher across a flatter
yield curve, with the 10-year             rising 32 cents
Canadian to yield 1.468%. Earlier in the session, the 10-year
yield touched its highest since June 12 at 1.522%.     

 (Reporting by Fergal Smith; Editing by Richard Chang)
  
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