Canadian dollar adds to 14-month high as factory data raises pressure on shorts

TORONTO (Reuters) - The Canadian dollar strengthened on Wednesday to a new 14-month high against its U.S. counterpart as a record level of domestic factory sales and higher oil prices added to pressure on investors who had got short the currency.

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

At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2593 to the greenback, or 79.41 U.S. cents, up 0.3 percent.

The loonie touched its strongest level since early May 2016 at C$1.2578. It has rallied roughly 7 percent since the Bank of Canada turned more hawkish in June. The central bank raised interest rates last week for the first time since 2010 and signaled it would hike again over the coming months.

“What you are seeing in FX markets is not about anybody necessarily getting bullish on the Canadian dollar but simply unwinding short CAD positions,” said Aubrey Basdeo, head of Canadian Fixed Income at BlackRock.

“It was just such a one-sided trade that it’s a painful way to get out of that market at this time.”

Speculators have cut bearish bets on the loonie for a seventh straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. Bearish bets had reached a record high in May.

Canadian factory sales grew by 1.1 percent in May from April, on higher sales of motor vehicles and parts. Analysts had forecast an increase of 0.8 percent.

The data shows that “the goods sector is delivering the goods for the Canadian economy,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a research note.

Prices of oil, one of Canada’s major exports, jumped to a six-week high after bullish U.S. inventory data.

U.S. crude CLc1 oil futures settled 1.6 percent higher at $47.12 a barrel.

U.S., Mexican and Canadian officials have agreed to an aggressive timetable to renegotiate the North American Free Trade Agreement (NAFTA), sources said, aiming to conclude early next year to avoid Mexico’s 2018 presidential elections.

Canadian government bond prices were lower across the yield curve, with the two-year CA2YT=RR down 6 Canadian cents to yield 1.228 percent and the 10-year CA10YT=RR falling 30 Canadian cents to yield 1.894 percent.

The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 3.1 basis points to a spread of -13.2 basis points, its narrowest since Aug. 18.

Potential for the Federal Reserve to pause its rate hikes has contributed to the narrower spread, BlackRock’s Basdeo said.

Reporting by Fergal Smith; Editing by Meredith Mazzilli and Sandra Maler