TORONTO: The Canadian dollar strengthened to a two-month high against its US counterpart on Friday as domestic factory data supported recent narrowing in the gap between US and Canadian bond yields.
The loonie was trading 0.4 percent higher at 1.3875 per US dollar, or 72.07 US cents, after touching its strongest intraday level since June 3 at 1.3865. For the week, the currency was up 0.5 percent, putting it on track for its third straight weekly gain.
“The retrenchment in Fed tightening expectations — which has further to go, we believe — has driven a significant narrowing in front-end spreads since the end of July,” Shaun Osborne and Eric Theoret, strategists at Scotiabank, said in a note.
The gap between Canada’s 2-year yield and the US equivalent has narrowed by about 17 basis points this month to 120 basis points in favor of the US note.
“At the margin, Friday’s disappointing US retail sales data and the better-than-expected Canadian manufacturing sales data sustain the recent shift in the trend of relative data surprises … which will also feed through to the exchange rate,” the strategists said.
Canadian factory sales grew 0.1 percent in June from May, the fifth straight month of gains, while sales volumes were up 1.2 percent.
Separate data showed wholesale trade rising by 2.8 percent in June.
The US dollar fell against a basket of major currencies after data showed US retail sales unexpectedly declined in July.
The price of oil, one of Canada’s major exports, was trading 0.8 percent higher at USD81.88 a barrel after the US threatened an indefinite naval blockade of Iran, raising concerns about disruptions to crude supplies from the Middle East.
Canadian government bond yields moved higher across a steeper curve, tracking moves in US Treasuries. The 10-year was up 5.5 basis points at 3.681 percent, but holding below the two-year high it touched on Tuesday at 3.755 percent.
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