TORONTO: The Canadian dollar on Friday rallied to its strongest close against the greenback since late April after data showed Canada's economy grew at a quicker pace than expected in the second quarter and after Federal Reserve Chairman Ben Bernanke said the US central bank would take stimulus action as needed.
Bernanke said the US economy faces "daunting" challenges and that progress in reducing unemployment has been too slow, but he stopped short of providing a clear signal of further monetary policy easing by the Fed.
His comments initially drove stocks and the Canadian currency lower but the tide turned as the market digested the speech.
"The initial reaction in most financial markets was a little bit of a disappointment, initially. The risk obviously was that he ended up having no imminent plans on the table," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
"Second read of it had risk appetite come back again. The Canadian dollar pretty much followed that."
The Canadian dollar closed at C$0.9857 versus the US currency, or $1.0145, stronger than Thursday's North American session close of C$0.9923, or $1.0078. It was the strongest close for the currency since April 27.
It rose as high as C$0.9852, or $1.0150, after Bernanke's speech.
The Canadian dollar was also firmer against most other major currencies, including the euro and Australian dollar.
Also helping its rise was data that showed Canada's GDP grew at an annualized 1.8 percent in the second quarter, exceeding analysts' estimates.
"A little bit stronger than what the market had looked for. The underlying details still show pretty much the theme we expected with respect to some fading domestic demand," said David Tulk, chief Canada macro strategist, TD Securities.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate hike in 2013 after the data.
The Canadian dollar got an early-session boost from comments by European Central Bank member Benoit Coeure that spurred market expectations that the ECB will intervene to help tackle the region's three-year-old debt crisis.
Coeure said ECB bond purchases in the sovereign debt market must be subject to strict conditionality. The comment fueled hopes the central bank will buy Spanish and Italian government bonds to reduce the high borrowing costs the two governments are facing.
The Canadian currency will seek direction from a number of events heading into September. Next week will see the Quebec provincial election, a Bank of Canada rate announcement and US and Canadian employment figures for August.
"(Bernanke) suggested (the situation) was very data-dependent going forward, so next Friday's payrolls are obviously the next chief hurdle," Chandler said.
He also pointed to Fed meetings the following week as well as a German court ruling on the constitutionality of bond buying in Europe. "So we're set to have more meaningful moves in financial markets over the next two weeks," Chandler said.
Canadian bond prices were mostly lower on Friday, with the two-year bond down 5 Canadian cents to yield 1.152 percent and the benchmark 10-year bond down 5 Canadian cents to yield 1.776 percent.
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