Canadian dollar notches biggest gain since March as rate hike bets jump

TORONTO (Reuters) - The Canadian dollar scored its biggest gain in three months on Wednesday against its U.S. counterpart, as hawkish comments by Bank of Canada Governor Stephen Poloz raised expectations of an interest rate hike as early as July.

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

Interest rate cuts made in 2015 have done their job and the Bank of Canada needs to consider its options at its upcoming policy meeting as excess capacity is used up, Poloz said in a CNBC interview in Europe.

“That’s a pretty solid signal that a July rate hike is very much on the table,” Benjamin Reitzes, senior economist at BMO Capital Markets, said in a research note.

Chances of a rate hike next month rose to 45 percent from 30 percent on Tuesday, data from the overnight index swaps market showed.

“The market is clearing a path for him to hike, so that makes it in my opinion more likely he takes that window,” said Jimmy Jean, senior economist at Desjardins.

At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3030 to the greenback, or 76.75 U.S. cents, up 1.3 percent, its biggest advance since mid-March.

The currency’s weakest level of the session was C$1.3198, while it touched its strongest since Feb. 16 at C$1.3010.

Adding to support for the loonie, prices of oil, one of Canada’s major exports, climbed to their highest in more than a week as buyers were encouraged by a small weekly decrease in U.S. production.

Strengthening of the loonie could pressure speculators to further reduce bearish bets on the currency, which had reached a record high in May.

Speculators have cut bearish bets on the loonie for a fourth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday.

Conversations with market participants and business surveys are invaluable for the Bank of Canada’s decision-making, Deputy Governor Lynn Patterson said in a speech that reiterated the hawkish sentiment that rate cuts had done their work.

Canadian government bond prices were lower across a flatter yield curve. The two-year notes CA2YT=RR fell 10.5 Canadian cents to yield 1.039 percent, the first move above 1 percent in nearly 2-1/2 years, while the 10-year CA10YT=RR declined 38 Canadian cents to yield 1.614 percent.

The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 7.1 basis points to a spread of -31.7 basis points, its narrowest since Nov. 10, as Canadian government bonds underperformed.

Reporting by Fergal Smith; Editing by Nick Zieminski and Dan Grebler