C$ posts three-and-a-half-month high as Poloz signals rate hikes

TORONTO (Reuters) - The Canadian dollar strengthened to a 3-1/2-month high against its U.S. counterpart on Tuesday as comments by Bank of Canada Governor Stephen Poloz supported the view the central bank could raise interest rates sooner than previously thought.

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

Interest rate cuts instituted in 2015 have largely done their job as the Canadian economy gathers momentum, the Bank of Canada’s head said, the second top official in as many days to set the stage for rate hikes.

Chances of an interest rate hike this year have surged to three-in-four from less than one-in-four before stronger than expected jobs data on Friday, data from the overnight index swaps market shows.

At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3237 to the greenback, or 75.55 U.S. cents, up 0.7 percent.

The currency’s weakest level was C$1.3325, while it touched its strongest since Feb. 28 at C$1.3212.

Strengthening of the currency could put pressure on often-leveraged speculators to cover short positions and accelerate any move higher in the currency.

“The market was excessively short Canadian dollars, so this could be a move that is a little bit overdone,” said Michael Goshko, Corporate Risk Manager at Western Union Business Solutions.

Bearish bets on the loonie held near a record high as of June 6, data from the Commodity Futures Trading Commission and Reuters calculations showed on Friday.

Meanwhile, Canadian importers have reaped the benefit of a stronger currency.

“The large corporate, experienced, well-heeled buyer ... they have been planning for this move and they’re executing on it,” said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets.

Adding to support for the loonie, prices of oil, one of the country’s major exports, edged higher after OPEC detailed supply cuts around the world. [O/R]

U.S. crude oil futures CLc1 settled 38 cents higher at $46.46 a barrel.

The U.S. dollar .DXY inched down as traders eyed the Federal Reserve interest rate decision on Wednesday.

Canadian government bond prices were much lower across the yield curve, with the two-year CA2YT=RR down 12.5 Canadian cents to yield 0.911 percent and the 10-year CA10YT=RR falling 69 Canadian cents to yield 1.561 percent.

The 2-year yield, which has jumped more than 18 basis points since Friday’s jobs data, touched its highest intraday since January 2015 at 0.930 percent.

Reporting by Fergal Smith; Editing by Chris Reese