Canadian dollar notches nine-month high on oil price climb, rate hike bets

TORONTO (Reuters) - The Canadian dollar hit a nine-month high against its U.S. counterpart on Friday, boosted by higher oil prices and domestic growth which supported the Bank of Canada’s recent switch to a more hawkish stance.

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

The central bank also said Canadian companies were more optimistic about future sales and exports, while improving demand was driving capacity pressures that should boost investment and hiring, in a report on Friday that further increased expectations for a rate hike.

At 4 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2967 to the greenback, or 77.12 U.S. cents, up 0.3 percent. It touched its strongest since Sept. 9 at C$1.2947 during the session.

But further appreciation for the currency will require follow-through on the newly hawkish tone, according to Brad Schruder, a director of foreign exchange sales at BMO Capital Markets.

“The Bank of Canada has talked the talk and now they need to walk the walk,” he said. “In addition, they need to convince the market that this is the beginning of cycle towards tighter monetary policy rather than just removal of the emergency cut Governor Poloz put in a couple of years ago.”

Speculators cut bearish bets on the Canadian dollar for a fifth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions tumbled to 49,495 contracts as of June 27 from 82,881 a week earlier.

Canada’s economy expanded by 0.2 percent in April after a 0.5 percent increase in March, Statistics Canada said. The gain matched analysts’ estimates.

It leaves the economy on track to grow at a 2.5 percent pace in the second quarter, which is “more than enough to justify the recent change in tone from the Bank of Canada,” Avery Shenfeld, chief economist at CIBC Capital Markets said in a research note.

Chances of a Bank of Canada rate hike in July have increased to one-in-two from just 20 percent after subdued inflation data last week, data from the overnight index swaps market shows.

Oil prices climbed for a seventh straight session in their longest bull run since April but were still set for the worst first-half performance since 1998.

U.S. crude futures CLc1 settled up $1.11, or around 2.5 percent, at $46.04 a barrel.

The two-year CA2YT=RR price dipped 3.5 Canadian cents to yield 1.100 percent and the 10-year CA10YT=RR declined 48 Canadian cents to yield 1.762 percent.

Additional reporting by Fergal Smith; Editing by Richard Chang