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Aug 31, 2017

Loonie rallies as GDP surprise raises rate hike expectations

Loonie won’t go higher than 80 cents US: Investment strategist

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The Canadian dollar surged more than 1 per cent against its U.S. counterpart on Thursday, after data showing the strongest economic growth rate in nearly six years boosted chances of another interest rate hike from the Bank of Canada.

Gross domestic product grew at an annualized 4.5 per cent pace in the second quarter, handily topping forecasts for 3.7 per cent, as consumers continued to spend and energy exports rose, data from Statistics Canada showed. Separate data showed GDP grew 0.3 per cent in June.

Chances of a rate hike as early as next week climbed to 37 per cent from around 20 per cent before the data, while investors see a nearly 90 per cent chance of a hike by October, data from the overnight index swaps market showed. 

"The probability for September shifted quite a bit," said Shaun Osborne, chief currency strategist at Scotiabank, but he cautioned that such a move could risk raising market expectations about more rate hikes to come.

"I don't think the Bank is going to put itself in a position where the market thinks it's starting to get ahead of where the Fed is," Osborne said.

The central bank's policy rate sits at 0.75 per cent, after it was raised in July for the first time in nearly seven years.

At 4:00 p.m. ET, the Canadian dollar was trading at $1.2487 to the greenback, or 80.08 cents US, up 1.1 per cent.

The currency's strongest level of the session was $1.2481, while it had touched its weakest since Aug. 18 before the data at $1.2663.

Adding to support for the loonie, U.S. crude oil prices rebounded after being pressured this week by Tropical Storm Harvey, which knocked out about a quarter of U.S. refinery capacity.

U.S. crude prices settled up US$1.27, or 2.76 per cent, at US$47.23 a barrel.

The U.S. dollar softened against a basket of currencies following lackluster U.S. economic data that failed to boost expectations for another Federal Reserve rate increase this year. Caution ahead of Friday's U.S. jobs report and month-end investment flows also weighed.

Canadian government bond prices were mostly lower across the yield curve, with the two-year price down 7 cents to yield 1.275 per cent and the 10-year falling 13 cents to yield 1.851 per cent.

The gap between the Canadian 2-year yield and its U.S. equivalent narrowed by 4.3 basis points to a spread of -5.5 basis points, its narrowest since July 31.

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