CANADA FX DEBT-C$ hits 2-1/2 month high as BoC talks rate hikes

* C$ at C$0.9474 to the U.S. dollar, or $1.0555

* Touches highest level since May 2

* Bank of Canada talks about tightening plans

* Improved global risk sentiment supports.

By Trish Nixon

TORONTO, July 20 (Reuters) - Canada’s dollar strengthened to a 2-1/2 month high against the greenback on Wednesday, after the Bank of Canada discussed the prospect of higher rates and investors became more hopeful about European and U.S. debt woes.

A day after raising expectations it would increase interest rates soon, the Bank of Canada said it might keep rates below their normal long-run levels even after the Canadian economy is back to full capacity. [ID:nN1E76J0N0]

The currency built on gains of nearly a penny seen on Tuesday, when the surprisingly hawkish language in its rate decision statement spurred buying.

“You can argue that part of that was a residual effect from yesterday and the rates statement,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

“They certainly didn’t in the press conference take anything back in terms of a more aggressive bias. If anything they reinforced it. So that was the main reason for the underpinning in the Canadian dollar.”

Bank of Canada Governor Mark Carney said that as the recovery progresses, monetary policy can be expected to move away from exceptionally stimulative levels, though he also highlighted global risks.


For Reuters Insider coverage of Carney's press conference, click on:


A Reuters survey taken after he spoke showed most of Canada’s primary dealers expect the central bank to raise interest rates in September or October. [CA/POLL]

Higher interest rates tend to support a country’s currency by attracting international capital flows.

“Yesterday, I think the market was a bit surprised by how hawkish the Bank of Canada sounded in their communique,” said Charles St-Arnaud, Canadian economist and currency strategist with Nomura Securities International in New York.

“Today, the Monetary Policy Report only confirmed and gave a bit more detail on the outlook.”

The currency was also supported by macroeconomic events, as world stocks, with the exception of Wall Street, rallied on strong earnings and expectations that European officials could achieve a viable financial rescue for Greece at a summit in Brussels on Thursday. [MKTS/GLOB]

The currency CAD=D4 closed at C$0.9474 to the U.S. dollar, or $1.0555, up from Tuesday's North American finish at C$0.9508, or $1.0517.

Earlier, it jumped to C$0.9457 to the U.S. dollar, or $1.0574, its strongest level since May 2.

Chandler said he expected the currency could climb as high as C$0.94 in the near term, though he noted that it had come a long way in a relatively short period, and could encounter a bit of a hurdle.

Canadian government bond prices were lower across the curve, reflecting the possibility that interest rate increases may come before year-end.

The two-year bond CA2YT=RR, which is especially sensitive to rate moves, was down 9 Canadian cents to yield 1.527 percent, while the 10-year bond CA10YT=RR lost 42 Canadian cents to yield 2.947 percent.

A Reuters poll of analysts released on Wednesday suggested that Canadian government bond yields will climb in the coming year as an expanding global economy and fading sovereign debt fears prompt the central bank to resume hiking rates. [ID:nN1E76J085] ($1=$0.95 Canadian) (Editing by Jeffrey Hodgson)