Canadian dollar gains

The Canadian dollar recovered from midsession losses and gained against the greenback on Friday, propelled by stronger-than-forecast Canadian employment numbers. Predictions of further weakness continued to hover over the loonie, however, particularly due to heightened expectations that the Bank of Canada could announce a 25 basis point interest rate cut next week as "insurance" to help stimulate growth in the economy, which has been largely stagnant through the first half of the year.
"We're seeing that get priced into USD/CAD at the moment, hence why we've moved all the way to C$1.27 over the last few sessions. That's quite a move," said Lennon Sweeting, currency strategist at USForex in Toronto. "I tend to think it's just noise, I don't see a rate cut as a necessity at the moment ... A rate cut from Bank of Canada would be a little too cautionary at this point in time and would probably lead USD/CAD to march into the C$1.30s fairly quickly."
The Canadian dollar finished the day at C$1.2679 to the greenback, or 78.87 US cents, stronger than the Bank of Canada's official close of C$1.2707, or 78.70 US cents, on Thursday. The loonie has been mostly range-bound this week after shedding nearly 4 percent since mid-June. It traded between C$1.2663 and C$1.2754 during the session, touching its firmest level in the morning, shortly after the jobs report was released. The report showed the economy shed 6,400 jobs in June, fewer than the 10,000 jobs expected to be lost, prompting markets to scale back some of their bets on the likelihood of a rate cut.
"There had been concern of a risk of a more significant decline that was even weaker than the consensus call. So this report has eased those concerns," said Paul Ferley, assistant chief economist at Royal Bank of Canada. Many currency strategists still see the loonie heading toward C$1.28 to C$1.30 over the longer term as Bank of Canada policy diverges from that of the US Federal Reserve. Fed Chair Janet Yellen explicitly said on Friday she expects the Fed to hike rates later this year.
Canadian government bond prices were lower across the maturity curve, with the two-year price down 7 Canadian cents to yield 0.499 percent and the benchmark 10-year falling 80 Canadian cents to yield 1.685 percent. The Canada-US two-year bond spread was -14.6 basis points, while the 10-year spread was -71.8 basis points.