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The Canadian dollar hit its highest level since November 2007 on Monday afternoon after fourth-quarter GDP data topped expectations and backed predictions that the Bank of Canada will resume interest rate hikes in the first half of the year.
Annualized GDP growth in the quarter was 3.3 percent, boosted by surging exports and strong consumer spending, Statistics Canada said. Statscan also revised third-quarter GDP growth to 1.8 percent from 1.0 percent. Economists polled by Reuters had expected annualized growth of 3.0 percent in the fourth quarter.
Bank of Canada Governor Mark Carney had conceded earlier this month that the bank's January forecast of 2.3 -ercent growth in the fourth quarter was likely short of the mark, suggesting the export strength was a surprise.
"It's certainly above market expectations, but more importantly above the BoC's expectations," said Jonathan Basile, economist at Credit Suisse in New York.
The Canadian currency rose as high as $0.9710 Cdn to the U.S. dollar, or $1.0291 US in late afternoon trading.
A second economic report added support, with the export comeback also helping narrow Canada's current account deficit.
The GDP figures come one day ahead of a scheduled Bank of Canada policy announcement, but market operators see little chance of the central bank lifting interest rates.
Canadian bond prices were lower across the curve, particularly in the short-dated issues, as evidence of momentum in Canada's economic recovery increased the chances of interest rate hikes later this year.
The interest rate-sensitive two-year bond turned lower, down 9 cents Cdn to yield 1.824 percent, while the 10-year bond fell 13 cents Cdn to yield 3.308 percent.
Market watchers now expect stronger language on the economic outlook in the Bank of Canada's commentary on Tuesday's rate decision, which may lay the groundwork for an interest rate increase in either April or May.
"I think we will hear a more two-handed statement from the Bank of Canada tomorrow, which could set the stage for a rate hike in coming months," said Sal Guatieri, senior economist at BMO Capital Markets.
"(The GDP data) is moving in the right direction, consistent with an economy that's picking up steam."
But not all market watchers were convinced that the Bank of Canada will move quickly on rates.
"I think it's a good report, stands up to scrutiny, but it still, in my mind, doesn't change anything for the Bank of Canada," said Derek Holt, economist at Scotia Capital.
"I think they're likely to say that we've seen a bit of growth momentum of late, but we're more concerned about the developments in global commodities, downside risks to global growth compared to the last statement."