TORONTO (Reuters) - The Canadian dollar, one of the few major currencies to make gains against the U.S. dollar in the previous session, extended its advance on Wednesday on expectations that domestic interest rates will go up in the months ahead.
Canadian government bonds held onto early gains, despite stronger-than-expected U.S. housing starts in September, as equity markets fell.
At 9:25 a.m. (1325 GMT), the Canadian dollar was at C$1.1758 to the U.S. dollar, or 85.05 U.S. cents, up from C$1.1784 to the U.S. dollar, or 84.86 U.S. cents, at Tuesday's close.
Data released on Wednesday - the day between two major Bank of Canada policy announcements - had a limited effect on the loonie's already firm tone.
On Tuesday, the central bank raised its key overnight rate to 3 percent and suggested more rate hikes are on the way.
"The Canadian dollar is building on yesterday's gains, especially with the sentiment, a very clear message from the Bank of Canada that rates are going to be continuing to rise," said Carolyn Kwan, financial markets economist at Scotia Capital.
That message should be reinforced on Thursday when the central bank releases its Monetary Policy Report, a more extensive look into the bank's thinking on the economy.
The bank said on Tuesday the economy was running at full capacity and would continue to do so through 2007. Last month, the bank said the economy would hit capacity only by the second half of 2006.
Some dealers said recent merger and acquisition news helped lift the Canadian dollar as foreign companies looked set to take over some Canadian firms. Europe's biggest tourism firm TUI said on Wednesday its $2 billion cash offer to take over container shipper CP Ships had received investor backing.
Meanwhile, Canadian-headquartered PetroKazakhstan Inc. shareholders voted more than 99 percent in favor of a $4.2 billion offer by Chinese state oil firm CNPC.
BONDS RISE
Canadian bonds barely held its gains as U.S. housing starts figures were digested and as equity markets fell.
In economic news, U.S. housing starts jumped 3.4 percent in September. Meanwhile, Canadian wholesale trade grew 0.7 percent in August, after falling 0.6 percent in July.
U.S. equity markets were seen coming under pressure from Intel Corp.'s disappointing revenue outlook, which raised concern that corporate profit growth may be slowing.
Canadian markets were also down steeply in early trading, following Tuesday's selloff.
The two-year bond rose 2 Canadian cents to C$98.53 to yield 3.477 percent, while the 10-year bond was up 3 Canadian cents at C$103.43 to yield 4.064 percent.
The yield spread between the two-year and 10-year bond moved to 58.7 basis points from 58.4 at the previous close.
The 30-year bond gained 13 Canadian cents to C$112.37 to yield 4.282 percent. In the United States, the 30-year treasury yielded 4.672 percent.
The three-month when-issued T-bill yielded 3.08 percent, unchanged from the previous close.
© Reuters Limited. All Rights Reserved.
Reproduction or redistribution of Reuters content, including framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
