TORONTO: The Canadian dollar strengthened against its US counterpart on Tuesday after data showed the economy grew at a faster pace than forecast during the fourth quarter, reinforcing expectations that the Bank of Canada will likely keep interest rates on hold.
The central bank is due to announce its March rate decision Wednesday morning and markets are pricing in about a 27 percent chance of another 25 basis point cut.
This is higher than the 20 percent chance markets were expecting earlier in the session, but still a far cry from the 80 percent last week, before Governor Stephen Poloz dispelled those expectations.
"It was a pretty good day ... bit (the Canadian dollar) hasn't been able to break out of the chop-fest we had in February. The market is clearly waiting for the Bank of Canada here," said Amo Sahota, director at Klarity FX in San Francisco.
"I think there's a little bit more nervousness in the market place than the price is actually showing."
The Canadian dollar, which was outperforming most of its major currency counterparts, finished the North American session at C$1.2490 to the greenback, or 80.06 US cents, stronger than Monday's close at C$1.2535, or 79.78 US cents. Earlier, it touched its firmest level of the session at C$1.2434, or 80.42 US cents.
Sahota said the Canadian dollar could potentially strengthen past the C$1.2350 area if the Bank of Canada confirms expectations and keeps rates steady at 0.75 percent.
On the data front, consumer spending and a build up in inventories offset a decline in exports, putting the annualized rate for Canadian gross domestic product at 2.4 percent, higher than the 2 percent economists had expected. Still, the figure was a step down from an upwardly revised 3.2 percent in the third quarter.
"The encouraging revisions and a decent hand off into Q1 I think does keep us with a better-than-feared outcome for the Canadian economy," said David Tulk, chief Canada macro strategist at TD Securities.
Canadian government bond prices were mixed across the maturity curve. The two-year fell 1 Canadian cent to yield 0.497 percent and the benchmark 10-year 51 Canadian cents to yield 1.424 percent.-Reuters
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