* Touches highest level in nearly 4 months
* Move exaggerated by thin trade
* Bond prices flat to lower (Adds details, quote)
By Jennifer Kwan
TORONTO, May 1 (Reuters) - The Canadian dollar shot higher versus the U.S. dollar on Friday as optimism that the economy may be on the road to stabilizing persuaded traders to buy currencies considered to be higher risk.
The Canadian dollar rallied as high as C$1.1831 to the U.S. dollar, or 84.52 U.S. cents, its highest level since Jan. 9.
The move added to gains recorded over the past two sessions, but Friday’s move may have been exaggerated by thinner than normal trade with some European markets closed for the May Day holiday.
Momentum in recent sessions suggests the unwinding of “risk aversion” trades, helping to boost currencies such as the Canadian dollar as well as the Australian and New Zealand dollars, said Millan Mulraine, economics strategist at TD Securities.
“There is growing sense of stabilization in the U.S. economy,” he said. “The recent flow of data have all pointed to the green shoots we’ve talked about repeatedly and in some sense that’s causing a lot of investors to think they don’t need to be as risk averse.”
Adding to that was a report on Friday that signaled U.S. consumers felt much more upbeat about the economy in April. [ID:nN01402214]
The currency finished the session at C$1.1859 to the U.S. dollar, or 84.32 U.S. cents, up from C$1.1930 to the U.S. dollar, or 83.82 U.S. cents, at Thursday’s close.
The Canadian dollar’s run-up reflected U.S. dollar weakness.
“The U.S. dollar is being sold off as risk trades are slowing being brought back,” said J.P. Blais, vice president of foreign exchange at BMO Capital Markets.
The currency was also supported by a rally in equity markets, which rose on higher oil prices CLc1 and on the report of improved U.S. consumer confidence. [ID:nSP378801]
Canadian bond prices were mostly lower alongside the bigger U.S. Treasury market, where bond prices dropped as the upbeat consumer confidence data dented the appeal of safe-haven bonds. [ID:nN01415364]
“That’s also part of the story of the unwinding of the risk aversion trade,” Mulraine said.
“Keep in mind people were rushing into Treasuries not too long ago as they feared for the worst. As those fears recede and confidence returns, a lot of positions are being unwound.”
With large debt issuance in the United States and Canada next week, supply concerns are also pressuring prices, strategists said.
The two-year Canada bond ticked lower, down 1 Canadian cent at C$100.53 to yield 0.991 percent, while the 10-year edged higher by 1 Canadian cent to C$105.65 to yield 3.093 percent.
The 30-year bond sagged 5 Canadian cents to C$119.80 to yield 3.841 percent. In the United States, the 30-year Treasury yielded 4.0850 percent.
Canadian bonds mostly outperformed their U.S. counterparts. The 30-year yield was 24.4 basis points below its U.S. counterpart, compared to about 20 basis points on Thursday. (Reporting by Jennifer Kwan; editing by Peter Galloway)