Loonie nears three-month high as investors eye further rate divergence

TORONTO (Reuters) - The Canadian dollar rose against the greenback on Wednesday, approaching a three-month high it notched the previous day, as investors expected further divergence in the interest rate policies of the Bank of Canada and the Federal Reserve.

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

Canada’s central bank, which is due to make an interest rate decision on Oct. 30, has kept its benchmark rate on hold at 1.75% this year, as the domestic economy added jobs at a robust pace and inflation stayed close to its 2% target.

“I think the focus is now more on the Bank of Canada versus the Fed approach to interest rates,” said Hosen Marjaee, senior portfolio manager at Manulife Asset Management. “It seems like the Bank of Canada is going to be steady in the month of October but the Fed is going to cut rates, most likely.”

Money markets expect the Federal Reserve to ease U.S. rates next week for the third time since July. That could lower the range for the Fed’s benchmark rate below the equivalent rate for the Bank of Canada of 1.75%.

Investors are ditching bets that Canada’s central bank will cut interest rates over the coming months, as the domestic economy shows resilience and the federal election result adds to prospects of growth-boosting fiscal spending next year.

Canadian Liberal Prime Minister Justin Trudeau said a middle-class tax cut would be the first order of business for his new minority government, which would seek support in parliament on a case-by-case basis.

At 3 p.m. (1900 GMT), the Canadian dollar was trading 0.1% higher at 1.3075 to the greenback, or 76.48 U.S. cents. The currency, which hit a three-month high on Tuesday at 1.3071, traded in a range of 1.3073 TO 1.3109.

Gains for the loonie came as the price of oil, one of Canada’s major exports, was boosted by data showing a surprise draw in U.S. crude stock. U.S. crude oil futures settled 2.7% higher at $55.97 a barrel.

Data from Statistics Canada showed a surprise drop for Canadian wholesale trade in August from July, down 1.2%. Analysts had forecast a 0.3% increase.

Canadian government bond prices were higher across the yield curve, with the two-year up 2 Canadian cents to yield 1.615% and the 10-year rising 9 Canadian cents to yield 1.510%.

The 10-year yield hit its lowest intraday level since Oct. 15 at 1.484%.

Reporting by Fergal Smith; Editing by David Gregorio and Peter Cooney