Canada dollar soars on job gains; bonds pull back

By Lynne Olver

TORONTO, April 5 (Reuters) - The Canadian dollar jumped
against the greenback on Thursday, reaching a 3-1/2 month high,
after a surprisingly powerful March employment report suggested
to some that the Bank of Canada will eventually hike interest
rates.

The currency closed at C$1.1506 to the U.S. dollar, or
86.91 U.S. cents, up from C$1.1592, or 86.26 U.S. cents, at
Wednesday's close.

The Canadian economy added a whopping 54,900 jobs in March,
blowing past forecasts for a 15,000-job gain, while the
unemployment rate stayed unchanged at a 31-year low of 6.1
percent.

The stronger than expected report was the latest in a
string of robust monthly jobs reports, and pushed the currency
as high as C$1.1487, or 87.05 U.S. cents, a level it has not
touched since late December. The Canadian unit eased slightly
in the afternoon, as market participants drifted away for the
Friday Easter holiday.

"The employment rate, arguably the best measure of
labor-market strength, is at a record high," at 63.5 percent,
said Warren Lovely, senior economist with CIBC World Markets in
Toronto.

"Tightness in the labor market is going to prevent the Bank
of Canada from entertaining easier (monetary) policy and the
Canadian dollar is reacting as you might expect, it's getting a
bit of a bid," Lovely said.

The Ivey Purchasing Managers Index, also released on
Friday, painted an upbeat picture as well. It rose to 67.3 in
March, the highest result since last June. An index reading
above 50 indicates an increase in purchasing activity.

Market talk continued to shift away from expectations of
interest rate cuts and towards the timing of a possible hike,
which would raise yields on Canadian investments and boost the
Canadian dollar.

However, analysts expect the central bank to hold rates
steady at its next decision date of April 24.

Canadian markets will be closed on Friday, when the U.S.
March non-farm payrolls data is due for release. The market is
anticipating about 120,000 new jobs. U.S. financial markets
will close early, and thinly staffed desks often exaggerate
price moves.

BONDS EDGE LOWER

Bond prices retreated on the jobs data, even though
moderate wage growth suggested to some that the Bank of Canada
will not have to raise rates in the near future to stave off
inflation. U.S. treasuries also moved lower.

The Bank of Canada's overnight rate stands at 4.25
percent.

The two-year bond fell 11 Canadian cents to C$99.42 to
yield 4.033 percent, while the 10-year bond fell 23 Canadian
cents to C$98.93 to yield 4.142 percent.

The yield spread between the two-year and 10-year bond
moved to 10.9 basis points from 13.3 at the previous close.

The 30-year bond slid 40 Canadian cents to C$124.30 to
yield 4.208 percent. In the United States, the 30-year treasury
yielded 4.876 percent.

The three-month when-issued T-bill yielded 4.18 percent,
unchanged from the previous close.