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Loonie jumps to 14-month high as shorts scramble to cover

A Canadian dollar or loonie is pictured in North Vancouver, on March 5, 2014.

Globe and Mail Update

The Canadian dollar touched a 14-month high against its U.S. counterpart on Friday as gains for oil added to support for the currency from higher interest rates, while data showed that bearish bets on the loonie have been slashed.

Speculators cut bearish bets on the loonie for a seventh straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions fell to 8,604 contracts as of July 11 from 39,372 contracts a week earlier.

Gains for the loonie, which rose for a third straight week, came after the Bank of Canada raised rates on Wednesday for the first time in seven years and signaled it will need to hike again over the coming months.

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"If you are a trader or a corporate and have to judge where the market might be going, you pretty much have to take the bank at its word," said Michael Goshko, Corporate Risk Manager at Western Union Business Solutions.

The central bank will follow up with another increase in October as it charts a course of gradual policy tightening, with two more hikes expected next year, according to a Reuters poll of primary dealers.

At 4 p.m. EDT (2000 GMT), the Canadian dollar was trading at $1.2650 to the greenback, or 79.05 U.S. cents, up 0.6 per cent.

Prices of oil, one of Canada's major exports, were boosted by lower U.S. stockpiles, a slight slowdown in U.S. crude production and signs of increased Chinese demand. U.S. crude prices settled 46 cents higher at $46.54 a barrel.

The currency's weakest level of the session was $1.2747, while it touched its strongest since May 2016 at $1.2645.

For the week, the loonie rose 1.8 per cent. It has gained more than 6 per cent since the Bank of Canada turned hawkish in June.

"Until we start seeing weakening economic data I think the market is going to be full steam ahead to higher rates and a stronger Canada" dollar, Goshko said.

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The U.S. dollar fell against a basket of major currencies after weaker-than-forecast data on consumer prices and retail sales in June raised doubts about whether the Federal Reserve would raise interest rates again in 2017.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year price rose 3.5 Canadian cents to yield 1.192 per cent and the 10-year gained 11 Canadian cents to yield 1.897 per cent.

Video: Highlights from the Bank of Canada's rate hike announcement
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