Canadian dollar hits one-month high on bets BoC will keep neutral target

TORONTO (Reuters) - The Canadian dollar strengthened to a one-month high against its broadly weaker U.S. counterpart on Monday, as oil prices climbed and some investors bet the Bank of Canada will stick this week to its plan to raise interest rates to a neutral range.

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

The Bank of Canada, which has hiked five times since July 2017 to leave its benchmark interest rate at 1.75 percent, is widely expected to refrain from further tightening on Wednesday following recent volatility in stock markets and the price of oil, one of Canada's major exports. BOCWATCH

Still, the central bank said as recently as last month that it will need to raise rates further to a neutral range of between 2.50 percent and 3.50 percent to achieve its inflation target.

“I think there are people thinking that the bank will stick to its guns a little bit, at least in terms of eventually getting back to neutral, and if so that should be supportive of the currency,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

Domestic data showed a surprise pick-up in the pace of purchasing activity in December. The Ivey Purchasing Managers Index rose to 59.7 from 57.2 in November, surpassing analysts’ expectations for 56.8.

At 4:07 p.m. (2107 GMT), the Canadian dollar CAD=D4 was trading 0.6 percent higher at 1.3296 to the greenback, or 75.21 U.S. cents. The currency, which rose nearly 2 percent last week, touched its strongest level since Dec. 7 at 1.3280.

Gains for the loonie came as the price of oil rebounded further from 1-1/2-year lows reached in December, on support from OPEC production cuts and steadying equities markets. U.S. crude oil futures CLc1 settled 1.2 percent higher at $48.52 a barrel.

Stocks advanced for a second straight session as the resumption of U.S.-China trade talks helped ease concerns that have pummeled the market in recent months, while the U.S. dollar .DXY was pressured by growing expectations the U.S. Federal Reserve will either pause or halt its interest rate hike cycle.

Canadian government bond prices were lower across a flatter yield curve in sympathy with U.S. Treasuries, with the two-year CA2YT=RR down 5 Canadian cents to yield 1.881 percent and the 10-year CA10YT=RR falling 15 Canadian cents to yield 1.947 percent.

Last Thursday, the 10-year yield hit its lowest since August 2017 at 1.814 percent.

Reporting by Fergal Smith; Editing by Alistair Bell and Tom Brown