C$ rallies as investors eye BoC's hawkish 'path' for rates

·2 min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to its highest level in nearly one week against its U.S. counterpart on Thursday as oil prices rose and a senior Bank of Canada official left the door open to another oversized interest rate increase.

The BoC continues to see front-loading of rate hikes as the best way to battle the hottest inflation in nearly four decades, said Senior Deputy Governor Carolyn Rogers, one day after the central bank raised its benchmark interest rate to a 14-year high of 3.25%.

Canada's central bank has tightened by 300 basis points since the start of 2022, which is more than any other central bank overseeing a G10 currency, including the Federal Reserve.

"It does look like the Bank of Canada is on a path to hike more than the Federal Reserve will," said Marty Halpin, interim head of markets at HSBC Bank Canada. "If you combine that with high oil prices ... I'm surprised that we haven't seen additional strength in the Canadian dollar."

The price of oil, one of Canada's major exports, settled nearly 2% higher at $83.54 a barrel, while the Canadian dollar was up 0.5% at 1.3185 to the greenback, or 75.84 U.S. cents. It touched its strongest level since last Friday at 1.3078.

Analysts expect Canada's currency to rally over the coming year, supported by higher interest rates and solid domestic economic prospects.

A stronger Canadian dollar would likely be welcomed by the BoC because it helps fight inflation, Halpin said.

Currency strength helps reduce the cost of imports.

Canadian government bond yields rose across the curve, tracking moves in U.S. Treasuries and German Bunds after an historically large rate hike by the European Central Bank.

The 10-year was up 5.2 basis points at 3.195%.

(Reporting by Fergal Smith in Toronto; Editing by Andrea Ricci and Matthew Lewis)