May 29, 2009 / 1:01 PM / in 8 years

Loonie shoots higher, ends May up 9.3 percent

TORONTO (Reuters) - Canada’s currency raced higher versus the U.S. dollar on Friday and touched its highest level in nearly eight months as commodity prices surged and upbeat economic data sideswiped the greenback.

After hoarding U.S. dollars during the worst of the global financial crisis, investors have started to unload the currency because of continuing signs that the worst of the global recession may have passed.

“It really was less of a Canadian dollar story and more of a U.S. dollar story as the U.S. dollar itself was weak across the board,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“The Canadian dollar was just moved along with the other commodity, cyclical, risk-type currencies ... in conjunction with the better appetite for global risk.”

A good chunk of the Canadian dollar’s surge came after data showed the U.S. economy contracted less than initially expected in the first quarter, which diminished the safe-haven allure of the greenback.

That data helped add to gains already under way as signs of economic strength from Japan and India overnight gave a bid to Canada’s currency.

The Canadian dollar rose to C$1.0898 to the U.S. dollar, or 91.76 U.S. cents, shortly after midday, its highest level since October 6, extending its torrid climb since falling to a four-year low in early March.

Other factors helping to fuel the rally were a jump in oil prices to a six-month high and a three-month high in gold prices.

The currency retreated a touch but still ended the session at C$1.0917 to the U.S. dollar, or 91.60 U.S. cents, which was nearly 2 U.S. cents above Thursday’s close of C$1.1148 to the U.S. dollar, or 89.70 U.S. cents.

The Canadian dollar has now stormed 19.7 percent above its March low, a move credited to a combination of higher prices for key Canadian commodities, some upbeat economic data and lower demand for the U.S. dollar.

The Canadian dollar rallied 9.3 percent in May, its biggest monthly gain since at least October 1950, according to Bank of Canada data that dates back to 1950.

The Canadian dollar did not appear to be affected by a report that showed Canada’s current account deficit widened to a record high in the first quarter as the global recession shrank the country’s surplus in goods trade.

The next Canadian data due out is Monday’s gross domestic product report, which is expected to show the economy shrank at an annualized rate of 6.6 percent in the first quarter.

It will be the last piece of data ahead of the Bank of Canada’s scheduled interest rate announcement on Thursday.

BONDS PRICES GET LATE BOOST

Canadian bond prices, mixed for much of the session, ended higher across the curve alongside the bigger U.S. Treasury market as dealers moved back into government debt after a steep selloff earlier in the week.

“It’s mostly just a correction of the huge selloff we had earlier this week,” said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment. “Plus, this is the last day of the month so you might have a bit of portfolio index buying ... and that’s why you got that late afternoon rally.”

Dong said the Canadian bond market will take its cue from Monday’s domestic GDP data and Thursday’s Bank of Canada rate announcement and accompanying statement.

The benchmark two-year government bond ended up 8 Canadian cents at C$100.03 to yield 1.234 percent, while the 10-year bond rose 65 Canadian cents to C$103.00 to yield 3.394 percent.

The 30-year bond jumped 60 Canadian cents to C$116.10 to yield 4.035 percent.

Canadian bonds underperformed their U.S. counterparts across most of the curve. The 30-year bond yield was about 31 basis points below the U.S. 30-year yield, compared with about 42 basis points on Thursday.

Editing by Peter Galloway

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