Canadian dollar climbs as retail sales gain boosts rate hike chances

TORONTO (Reuters) - The Canadian dollar strengthened on Thursday against its U.S. counterpart as solid domestic retail sales boosted expectations for an interest rate hike in July from the Bank of Canada.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Canadian retail sales rose 0.8 percent in April on higher gasoline prices and increased demand for home appliances and garden supplies, exceeding forecasts for a 0.2 percent gain.

The data shows a “stronger starting off point than people had assumed for Q2 consumption,” said Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Capital Markets.

Chances of a BoC rate hike as early as next month rose to 34 percent from less than one in four before the retail sales report, data from the overnight index swaps market showed. Traders have already priced in a rate hike for 2017 BOCWATCH.

The Bank of Canada’s top two officials last week said that looser monetary policies put in place in 2015 had largely done their work, and the bank would assess whether rates must remain at near-record lows.

Interest rate expectations have become a more important driver for the currency than the direction of oil prices, Chandler said.

Oil, one of Canada's major exports, edged up from multimonth lows, but prices remained under pressure from a supply glut. U.S. crude oil futures CLc1 settled 21 cents higher at $42.74 a barrel. [O/R]

At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3235 to the greenback, or 75.56 U.S. cents, up 0.8 percent.

The currency traded in a range between C$1.3208 and C$1.3338. In the previous session, the loonie touched its weakest in nine days at C$1.3348.

Gains for the Canadian dollar came as Home Capital Group Inc HCG.TO, which nearly collapsed in April, said Warren Buffett's Berkshire Hathaway Inc BRKa.N would provide a new C$2 billion line of credit to its Home Trust Co unit.

Bearish bets on the Canadian dollar had set a fresh record high in May as investors worried that the alternative lender’s troubles could hurt the country’s red-hot housing market.

Canadian government bond prices were lower across much of a flatter yield curve, with the two-year CA2YT=RR down 4 Canadian cents to yield 0.933 percent and the 10-year CA10YT=RR falling 9 Canadian cents to yield 1.5 percent.

The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 3 basis points to a spread of -41.1 basis points, its smallest since Feb. 24.

Canadian inflation data for May is due on Friday ECONCA.

Reporting by Fergal Smith, editing by G Crosse