TORONTO: The Canadian dollar gained against its US counterpart on Wednesday as the greenback's recent rally lost some steam and the Bank of Canada stuck to its view that rates will at some point need to move higher.
The loonie, as Canada's currency is colloquially known, gained in the initial aftermath of the central bank announcement, which was also outgoing Governor Mark Carney's last rate decision.
It then reversed course, breaking through the C$1.04 barrier for the second straight session, before corporate and institutional buyers emerged at what is considered the high end of the established range. Before Tuesday, the loonie had not breached C$1.04 since June last year.
"There was a great opportunity to sell (US dollars) again at around the C$1.04 level where we started to see some hedging interest and broad-based (US dollar) selling emerging," said Darcy Browne, a managing director of foreign exchange sales at CIBC World Markets.
The Canadian dollar ended at C$1.0352 to the greenback, or 96.60 US cents, compared with C$1.0395, or 96.20 US cents, at Tuesday's North American close. It had changed hands at C$1.0367 just before the rate decision was announced.
While the Canadian central bank was widely expected to keep the policy rate and tightening bias unchanged, there had been speculation in some quarters that it could be dropped, a decision that would likely have weakened the currency.
The greenback retreated against a range of currencies, most dramatically the safe haven yen and Swiss franc, as US bond yields came off 13-month highs.
"The market is being driven in the short term by higher short-term yields in the US, which have dipped off a little so the (US) dollar-buying gas pedal has come off a little bit," Browne said.
US yields have surged since Federal Reserve chairman Ben Bernanke said last Wednesday the US central bank might taper its program of buying Treasuries and mortgage-backed securities in the next few Fed policy meetings if data shows the economy is gaining steam.
Canadian government debt has reflected the US trend, but to a lesser degree.
The two-year bond ended almost flat to yield 1.075 percent, while the benchmark 10-year bond gained 11 Canadian cents to yield 2.066 percent.
With a rate increase seen as far off into the future, the loonie is likely to remain beholden to events in the United States, Canada's biggest trading partner.
"Probably the bigger driver of the Canadian dollar is going to be developments south of the border. We've got the (Canadian) dollar weakening significantly in our forecasts, but a good part of that is likely due to US dollar strength," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.
The Bank of Canada decision balanced the impact of weaker-than-expected inflation data and more robust growth. Canada is still expected to lag its southern neighbor this year.
"Like any currency, what's more important is the relative performance between the Canadian and US economies," Burleton said. "Nothing has changed the story that Canada's economy is no longer the growth outperformer."
First-quarter gross domestic product data due on Friday will provide the next major Canadian data point, with expectations of a decent jump already priced in to the currency, analysts said.
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