September 4, 2019 / 2:56 PM / 10 months ago

CANADA FX DEBT-Loonie rallies as investors dial back October rate cut bets

 (Adds strategist quotes and details throughout; updates prices)
    * Canadian dollar rises 0.4% against the greenback
    * Bank of Canada leaves benchmark rate on hold at 1.75%
    * Canada posts a C$1.12 billion trade deficit in July
    * Canada-U.S. 2-year spread hits narrowest since October

    By Fergal Smith
    TORONTO, Sept 4 (Reuters) - The Canadian dollar strengthened
against the greenback on Wednesday as expectations fell for a
Bank of Canada interest rate cut over the coming months after
the central bank, in a policy announcement, made no mention of
future moves.    
    The Bank of Canada held its benchmark interest rate at 1.75%
as expected but said the escalating U.S.-China trade war was
doing more damage to the global economy than it had forecast in
    "They haven't pigeon-holed themselves into an October cut,
and referenced the deterioration (in the world trade outlook)
but also heavily stressed the fact that the Canadian economy has
exceeded expectations in the last few months," said Simon
Harvey, FX market analyst for Monex Europe and Monex Canada.
"This is why the loonie is rallying."
    Chances of an interest rate cut in October fell to about 50%
from nearly 70% before the announcement, data from the overnight
index swaps market showed.
    Canada's economy expanded at a surprisingly strong
annualized rate of 3.7% in the second quarter, a pace much
higher than the Bank of Canada had predicted, thanks to a
resurgence in goods exports.             
    But data on Wednesday showed that Canada's trade deficit was
wider-than-expected at C$1.12 billion in July, a sign that the
boost to the domestic economy from trade in the second quarter
may not be repeated.             
    At 10:36 a.m. (1436 GMT), the Canadian dollar          was
trading 0.4% higher at 1.3290 to the greenback, or 75.24 U.S.
cents. The currency, which hit on Tuesday its weakest intraday
level in two-and-a-half months at 1.3382, traded in a range of
1.3268 to 1.3343.
    Gains for the loonie came as the price of oil, one of
Canada's major exports, was boosted by a wider market pickup on
positive news from China's services sector, after three days of
losses due to fears about a weakening global economy.
    U.S. crude        prices were up 3.6% at $55.87 a barrel.   
    Canadian government bond prices were lower across the yield
curve, with the two-year            down 1.5 Canadian cents to
yield 1.324% and the 10-year             falling 13 Canadian
cents to yield 1.128%.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 1.4 basis points to a spread of -13.2
basis points, its narrowest gap since October 2017.

 (Reporting by Fergal Smith; Editing by Steve Orlofsky and David
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