The Canadian dollar strengthened into a two-year high against its U.S. counterpart on Tuesday as oil rallied and the greenback lost ground widely, while investors weighed prospects of a Bank of Canada interest rate hike as early as this week.
Costs of oil, one of Canada’s leading exports, increased as the slow restart of refineries in the Gulf of Mexico that were closed by Hurricane Harvey increased demand for crude.
U.S. crude prices settled 2.9 percent higher at $48.66 per barrel.
The U.S. dollar dropped against a basket of major currencies that comprised the safe-haven yen, driven by North Korea’s biggest nuclear test and a Federal Reserve official’s remarks about low U.S. inflation.
North Korea on Sunday ran its sixth nuclear test, which it said was of a complex hydrogen bomb to get a long-range missile.
“The U.S. dollar is usually weak,” said Daniel Katzive, head of FX strategy North America. “Anticipation that the Bank of Canada could increase as soon tomorrow is providing some additional support (for the loonie).”
On Wednesday, the Bank of Canada will probably announce that it will leave rates unchanged, a Reuters poll published on Friday showed. The bank will most likely wait until October to increase them, according to the survey.
Still, the odds of a hike this week have climbed to almost 40 percent, the overnight index swaps market signaled, from around 20 percent before data on Thursday showing Canada’s economy expanded in the second quarter at its fastest rate in almost six decades.
The central bank increased rates in July for the first time in almost seven decades. Its coverage rate stands at 0.75 percent.
At 4 pm, the Canadian dollar was trading at $1.2383 to the greenback, or 80.76 U.S. cents, up 0.3 percent.
The money’s weakest level of this session was $1.2416, while it touched its strongest since June 2015 at $1.2336.
Canadian government bond prices were mixed across a flatter yield curve as worries over North Korea fed investor demand for safe-haven assets, such as longer-dated government bonds.
The two-year cost dipped 1.5 cents to yield 1.349 percent and the 10-year increased 47 cents to yield 1.861 percent.
The two-year return climbed 5.5 basis points over its U.S. equivalent, the widest gap for its spread as May 2015.
Canada’s trade data for July is also due on Wednesday, while the August employment report is awaited on Friday.