Canadian dollar notches two-week high on positive NAFTA signs

TORONTO (Reuters) - The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Wednesday, as higher oil prices and signs of progress in negotiations to revamp the NAFTA trade pact offset domestic data for June showing a drop in retail sales.

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

Agreement between Mexico and the United States on outstanding bilateral issues in renegotiating the North American Free Trade Agreement could be just a few hours away, Mexican officials said.

The news on NAFTA, which also includes Canada, is raising expectations that the three parties can reach a deal before U.S. congressional elections in November, said Karl Schamotta, director global markets strategy at Cambridge Global Payments

“That is helping to boost flows into Canada and helping to remove some of the risk premium that has been attached to the Canadian dollar,” Schamotta said.

Canada sends about 75 percent of its exports to the United States, so its economy could be hurt if NAFTA is scrapped.

The price of oil, one of Canada’s major exports, surged after U.S. government data showed a larger-than-expected draw in domestic crude inventories and as Washington’s sanctions on Iran signaled tightening supplies.

U.S. crude oil futures CLc1 settled 3.1 percent higher at $67.86 a barrel.

At 3:04 p.m. (1904 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent higher at C$1.3005 to the greenback, or 76.89 U.S. cents. The currency touched its strongest level since Aug. 7 at C$1.2988.

Canadian retail trade fell 0.2 percent in June, short of the 0.1 percent gain that economists had predicted, as sales at gasoline stations and motor vehicle and parts dealers fell, Statistics Canada said.

But the dip in sales, which compared with an upwardly revised 2.2 percent increase in the prior month, had little impact on money market expectations for a Bank of Canada interest rate increase as soon as next month. Chances of a September hike, which were boosted on Friday by hotter-than-expected inflation data, remained at more than 40 percent, the overnight index swaps market showed. BOCWATCH

Canadian government bond prices were mixed across a flatter yield curve, with the 10-year CA10YT=RR rising 3 Canadian cents to yield 2.254 percent.

The gap between the two-year and 10-year yields shrank by 1.4 basis points to a spread of 14.5 basis points, its narrowest since November 2007.

Reporting by Fergal Smith; Editing by Steve Orlofsky and Peter Cooney