Loonie holds near three-month high as investors bet on rate divergence

TORONTO (Reuters) - The Canadian dollar was nearly unchanged against the greenback on Thursday, pulling back from an earlier three-month high as investors turned their attention to interest rate decisions next week by the Bank of Canada and the U.S. Federal Reserve.

FILE PHOTO: 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 is seen leaving its benchmark interest rate on hold at 1.75% on Oct. 30 and over the coming months as the domestic economy shows resilience and the election of a minority federal government adds to prospects of increased fiscal spending.

In addition, economists in a Reuters poll were divided on whether the central bank should ease policy next year despite widespread expectations for growth to slow.

“I think expectations for a dovish Bank of Canada, or one that’s going to follow the Fed step for step in cutting rates has dialed back,” said Scott Smith, managing partner at Viewpoint Investment Partners. “That’s helping to drive the Canadian dollar higher.”

The Fed is expected to cut interest rates next week for the third time this year. That could lower the range for the Fed’s benchmark rate below the Bank of Canada’s equivalent rate for the first time since December 2016.

At 3:38 p.m. (1938 GMT), the Canadian dollar CAD=D4 was trading nearly unchanged at 1.3072 to the greenback, or 76.50 U.S. cents. The currency touched its strongest intraday level since July 22 at 1.3053.

The steady profile for the loonie came as Canada Mortgage and Housing Corporation, the country’s national housing agency, said that the housing market is expected to recover in the next two years after recent declines in new construction, sales and prices.

U.S. Trade Representative Robert Lighthizer met this week with Democratic lawmakers to try to resolve their concerns about the United States-Mexico-Canada (USMCA) trade agreement as Republicans increased pressure to get the deal passed by the end of 2019.

Canada sends about 75% of its exports to the United States, including oil.

U.S. crude oil futures CLc1 settled 0.5% higher at $56.23 a barrel, supported by a surprise drop in U.S. crude inventories and the prospect of further action by OPEC and its allies to support the market.

Canadian government bond prices were lower across the yield curve, with the two-year CA2YT=RR down 2 Canadian cents to yield 1.634% and the 10-year CA10YT=RR falling 5 Canadian cents to yield 1.524%.

Reporting by Fergal Smith; Editing by Paul Simao and Alistair Bell