Canadian dollar strengthens as economy expands faster than expected

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday after data showing stronger-than-expected GDP growth, but analysts doubted the Bank of Canada would become more optimistic about the economy’s outlook at next week’s policy announcement.

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

The Canadian economy expanded at a surprisingly strong annualized rate of 3.7% in the second quarter, a pace much higher than the Bank of Canada had predicted, thanks to a resurgence in goods exports, although business investment declined and growth in consumer spending slowed, Statistics Canada data indicated.

“The Bank of Canada was, I think, always going to be downplaying any economic strength we saw in this report,” said Andrew Kelvin, chief Canada strategist at TD Securities. “The fact that we are seeing these cracks in business investment and household spending makes it that much easier for them to do so.”

Whether the Bank of Canada waits until early 2020 to lower interest rates or does so this year has left economists polled by Reuters almost evenly divided, but they say the likelihood of a cut by year-end has increased dramatically from last month.

The central bank is expected to leave its benchmark interest rate on hold at 1.75% at the Sept. 4 policy announcement. Chances of a cut by October eased only slightly to 63% from 70% before the latest data, the overnight index swaps market indicated. BOCWATCH

At 9:16 a.m. (1316 GMT), the Canadian dollar CAD=D4 was trading 0.2% higher at 1.3257 to the greenback, or 75.43 U.S. cents. The currency, which was on track to fall 0.5% for the month, traded in a range of 1.3247 to 1.3311.

Meanwhile, the price of oil, one of Canada’s major exports, gave back some of its recent gains, but was still headed for the biggest weekly increase since early July, boosted by an easing of China-U.S. trade rhetoric, a decline in U.S stockpiles and a looming hurricane in Florida.

U.S. crude CLc1 oil futures fell 0.4% to $56.50 a barrel.

Canadian government bond prices were lower across the yield curve, with the two-year CA2YT=RR down 2.5 Canadian cents to yield 1.361% and the 10-year CA10YT=RR falling 5 Canadian cents to yield 1.154%.

Earlier this month, the 10-year yield hit its lowest level since October 2016 at 1.083%.

Reporting by Fergal Smith; editing by Jonathan Oatis