July 3, 2019 / 1:47 PM / a year ago

CANADA FX DEBT-C$ nears 8-month high after surprise swing to trade surplus

    * Canadian dollar rises 0.3% against the greenback
    * Canada posts May trade surplus of C$762 million
    * Price of U.S. oil increases 1.3%
    * Canada-U.S. 2-year spread hits narrowest since February

    TORONTO, July 3 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday, approaching a near
eight-month high notched last week, as oil prices rose and as
domestic data showed a surprise swing in the trade balance to a
surplus in May.
    Rising exports of motor vehicles, aircraft and energy
products helped Canada post a C$762 million trade surplus in
goods in May, Statistics Canada reported. Analysts had forecast
a shortfall of C$1.50 billion, while April's deficit was revised
slightly wider to C$1.08 billion.             
    The price of oil, one of Canada's major exports, rebounded
after a steep fall in the previous session as OPEC and its
allies' decision to extend output cuts was not enough to counter
investors' concerns about the slowing global economy. U.S. crude
oil futures        were up 1.3% at $56.99 a barrel.             
    At 9:14 a.m. (1314 GMT), the Canadian dollar          was
trading 0.3% higher at 1.3066 to the greenback, or 76.53 U.S.
cents. The currency, which touched on Friday a near eight-month
high at 1.3060, traded in a range of 1.3066 to 1.3119.
    The loonie has benefited in recent weeks from data showing a
recovery in the domestic economy, which could keep the Bank of
Canada on hold over the coming months even if the Federal
Reserve cuts interest rates as the market expects. Money markets
see about a 30% chance of a Bank of Canada interest rate cut
this year.           
    Clues to the direction of Canadian interest rates come from
Canada's jobs report for June, which is due on Friday.
    Canadian government bond prices dipped across a flatter
yield curve, with the two-year            down 3 Canadian cents
to yield 1.498% and the 10-year             falling 5 Canadian
cents to yield 1.472%.
    The gap between Canada's 2- and 10-year yields narrowed by
1.1 basis points to a spread of 2.6 basis points, its narrowest
gap since August 2007.
    Meanwhile, the gap between Canada's 2-year yield and its
U.S. equivalent narrowed by 1.7 basis points to a spread of 26.6
basis points in favor of the U.S. bond, its narrowest gap since
February last year.

 (Reporting by Fergal Smith; Editing by David Gregorio)
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