Canadian dollar jumps one percent as growth boosts bets on rate hike

TORONTO (Reuters) - The Canadian dollar surged more than 1 percent against its U.S. counterpart on Thursday after data showing the strongest economic growth rate in nearly six years, boosting chances of another interest rate hike from the Bank of Canada.

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

Gross domestic product grew at an annualized 4.5 percent pace in the second quarter, handily topping forecasts for 3.7 percent, as consumers continued to spend and energy exports rose, data from Statistics Canada showed. Separate data showed GDP grew 0.3 percent in June.

Chances of a rate hike as early as next week climbed to 37 percent from around 20 percent before the data, while investors see a nearly 90 percent chance of a hike by October, data from the overnight index swaps market showed. BOCWATCH

“The probability for September shifted quite a bit,” said Shaun Osborne, chief currency strategist at Scotiabank, but he cautioned that such a move could risk raising market expectations about more rate hikes to come.

“I don’t think the Bank is going to put itself in a position where the market thinks it’s starting to get ahead of where the Fed is,” Osborne said.

The central bank’s policy rate sits at 0.75 percent, after it was raised in July for the first time in nearly seven years.

At 4:00 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2487 to the greenback, or 80.08 U.S. cents, up 1.1 percent.

The currency’s strongest level of the session was C$1.2481, while it had touched its weakest since Aug. 18 before the data at C$1.2663.

Adding to support for the loonie, U.S. crude oil prices rebounded after being pressured this week by Tropical Storm Harvey, which knocked out about a quarter of U.S. refinery capacity.

U.S. crude CLc1 prices settled up $1.27, or 2.76 percent, at $47.23 a barrel.

The U.S. dollar .DXY softened against a basket of currencies following lackluster U.S. economic data that failed to boost expectations for another Federal Reserve rate increase this year. Caution ahead of Friday's U.S. jobs report and month-end investment flows also weighed.

Canadian government bond prices were mostly lower across the yield curve, with the two-year CA2YT=RR price down 7 Canadian cents to yield 1.275 percent and the 10-year CA10YT=RR falling 13 Canadian cents to yield 1.851 percent.

The gap between the Canadian 2-year yield and its U.S. equivalent narrowed by 4.3 basis points to a spread of -5.5 basis points, its narrowest since July 31.

Reporting by Fergal Smith and Solarina Ho; Editing by Bernadette Baum and Tom Brown