The Canadian dollar strengthened to a six-week high against its US counterpart on Friday as a jump in oil prices supported bets the Bank of Canada would tighten further, overshadowing disappointing GDP data.
The loonie was trading 0.2% higher at 1.3955 per US dollar, or 71.66 US cents, after touching its strongest intraday level since September 16 at 1.3943. For the month, the currency was on track to gain 2%, which would be its biggest monthly advance since April.
Canada’s economy stalled in August for the second straight month, while advance estimates showed GDP declining 0.1% in September and annualized third-quarter growth of 1.3%. The BoC has projected the economy growing by 2% in the third quarter.
“Markets ignored Canadian GDP and with good reason,” Derek Holt, head of capital markets economics at Scotiabank, said in a note.
“While the figures disappointed somewhat, the BoC is forward-looking and focused upon rising inflation risk that has many complex drivers — like oil that is fired up this morning,” Holt said.
On Wednesday, the Bank of Canada hiked its key interest rate by 25 basis points to 2.50% and said further increases might be needed to prevent soaring energy costs from driving broader inflation.
Investors see a roughly 50% chance the central bank tightens at its next policy decision in December and have fully discounted a move by January.
US crude oil futures were trading 2.7% higher at $104.80 a barrel as traders braced for a potential escalation in the US-Iran conflict after the US midterm elections. Oil is one of Canada’s major exports.
Canadian bond yields eased across a steeper curve as a sharp selloff in technology-related stocks pushed investors into safe-haven assets such as US Treasuries.
The 10-year was down 2.1 basis points at 3.780%, after earlier touching its lowest level since September 4 at 3.768%.