January 9, 2019 / 9:10 PM / 2 years ago

CANADA FX DEBT-C$ climbs to five-week high as bets rise for 2019 rate hike

 (Adds dealer quote and details on activity; updates prices)
    * Canadian dollar gains 0.4 percent against greenback
    * Price of U.S. oil rises 5.2 percent 
    * Loonie touches its strongest since Dec. 4 at 1.3180
    * Canadian housing starts fall to 213,419 units in December
    * Canada-U.S. 2-year spread narrows by 3.2 basis points

    By Fergal Smith
    TORONTO, Jan 9 (Reuters) - The Canadian dollar strengthened
to a five-week high against the greenback on Wednesday, boosted
by hopes of a trade deal between the United States and China and
increased expectations of a Bank of Canada interest rate hike
this year.
    The Bank of Canada held interest rates steady as expected on
Wednesday but said more increases would be necessary even though
low oil prices and a weak housing market will harm the economy
in the short term.             
    "I think they are basically saying, look can you give us a
bit of rope. Maybe that rope is three-months, six-months and
then we can reassess," said Amo Sahota, director at Klarity FX.
    Chances of a rate hike by December rose to 45 percent from
about 30 percent before the policy announcement, data from the
overnight index swaps market showed.           
    "I think it points to how the front-end of the Canada curve
is too rich," said Derek Holt, vice president of capital markets
at Scotiabank. "The market went too far in terms of pricing out
rate hikes further on."
    The Canadian dollar is expected to rally in 2019, recovering
some of last year's decline, as the Bank of Canada surprises
speculators who are betting it has already finished raising
interest rates, a Reuters poll showed.             
    Stocks and the price of oil climbed after talks between the
world's two largest economies raised hopes an all-out trade war
could be averted. U.S. crude oil futures        settled 5.2
percent higher at $52.36 a barrel.                         
    Canada is a major exporter of commodities, so its economy
could benefit from an improvement in the global trade outlook.
    At 3:56 p.m. (2056 GMT), the Canadian dollar          was
trading 0.4 percent higher at 1.3216 to the greenback, or 75.67
U.S. cents. The currency touched its strongest intraday level
since Dec. 4 at 1.3180.
    Gains for the loonie came as data showed
stronger-than-expected Canadian housing starts in December.
    The seasonally adjusted annualized rate of housing starts
fell to 213,419 units from an upwardly revised 224,349 units in
November, the Canadian Mortgage and Housing Corporation said.
Economists had expected starts to fall to 205,000 units.
    Canadian government bond prices were lower across the yield
curve, with the 10-year             falling 18 Canadian cents to
yield 1.989 percent.    
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 3.2 basis points to a spread of 65.1
basis points in favor of the U.S. bond.

 (Reporting by Fergal Smith
Editing by Tom Brown)
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