The Canadian dollar strengthened on Thursday, shaking off early weakness as strong oil prices and a weaker greenback drove the currency to its highest close in nearly three weeks. Bond prices rose strongly after a survey of Canadian business conditions showed expectations of declining new orders.
The currency finished at C$1.1228 to the US dollar, or 89.06 US cents, up from C$1.1258 to the US dollar, or 88.83 US cents, at Wednesday's close. A recommendation by a US investment house to buy the Canadian dollar on the back of higher energy prices gave the currency a boost after it fell early on the Statistics Canada survey. Statscan said more Canadian manufacturers expect to cut production and dismiss workers in the fourth quarter than in the third quarter.
"Other currencies have rallied against the US dollar better than Canada, but we saw a little bit of catch-up," said Jack Spitz, director of foreign exchange at National Bank Financial. US crude oil futures fell a bit more than a dollar on Thursday, but this followed a $2 rise on Wednesday. Higher prices improve the appeal of Canada's energy-exporting economy.
The US dollar continued to show weakness in the wake of the US Federal Reserve's statement on Wednesday, which was more benign than the market expected and eroded any expectations for another US rate hike.
But with Canadian interest rates also expected to be on hold for the next few months, strategists have had trouble determining in which direction the currency's next big move will be.
Of late, Canadian dollar traders have paid close attention to technical levels and kept a wary eye on commodity prices as the currency has meandered in a rough range of C$1.10-C$1.14 to the US dollar. "The IMM (currency futures) market continues to get long US dollars, so it would suggest that ultimately the breakout will be on the side of US dollar strength," Spitz said.
The Statscan manufacturing survey prompted bond buying, as it painted a much bleaker outlook for the fourth quarter than a similar poll did three months earlier. The balance of opinion on new orders, determined by subtracting the percentage of firms expecting more orders from those expecting a decrease, had its largest quarter-to-quarter drop since January 2001.
Scotia Capital economist Carolyn Kwan said in a note the results were not foreshadowed by other recent reports, but that the weakness would not be likely spur any shift in the Bank of Canada's monetary policy.
Canadian manufactures have been hit hard by the four-year rise of the Canadian dollar, which makes Canadian products more expensive to foreign buyers. There are no Canadian data due on Friday, but the release of US third-quarter growth will be closely watched.
The two-year bond rose 11 Canadian cents to C$100.43 to yield 4.035 percent, while the 10-year bond climbed 46 Canadian cents to C$99.08 to yield 4.116 percent. The yield spread between the two-year and 10-year bond moved to 8.1 basis points from 8.7 at the previous close.