The Canadian dollar rallied against its broadly weaker U.S. counterpart after the Federal Reserve raised interest rates, as expected, with investors betting that Canada will benefit from an improved outlook for the U.S. economy.
Fed officials acknowledged in their latest forecasts that the U.S. economy had gained steam in 2017 by raising their economic growth forecasts and lowering the expected unemployment rate for the coming years.
“With the rate hike, we see the flowers growing and the sun shining in the United States economy,” said Kash Pashootan, chief executive and chief investment officer at First Avenue Investment Counsel Inc. “A strong U.S. economy spills over into Canada and is positive.”
Canada sends about 75 percent of its exports to the United States.
The U.S. dollar lost ground against a basket of major currencies after the Fed left its interest rate outlook for the coming years unchanged.
Data showing a subdued rise in U.S. core inflation also weighed on the greenback.
The Canadian dollar was trading at C$1.2822 to the greenback, or 77.99 U.S. cents, up 0.3 percent.
The currency’s weakest level of the session was C$1.2882, while it touched its strongest at C$1.2792.
The loonie gained despite a drop in the price of oil, one of Canada’s major exports.
U.S. crude futures CLc1 settled nearly 1 percent lower at $56.60 a barrel as a larger-than-forecast rise in gasoline inventories offset a slump in U.S. crude stockpiles.
The loonie touched its weakest since Dec. 1 at C$1.2893. It had been pressured by the Bank of Canada’s dovish tone last week after it held its benchmark interest rate steady at 1 percent.
Bank of Canada Governor Stephen Poloz was due to discuss three things that keep him awake at night in a speech.
Data showed Canadian home prices fell again in November, the third straight monthly decline and the largest drop for the month outside of a recession.
Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR rose 3 Canadian cents to yield 1.504 percent and the 10-year CA10YT=RR gained 19 Canadian cents to yield 1.843 percent.
The gap between the 10-year yield and its U.S. equivalent narrowed by 3.5 basis points to a spread of -50.2 basis points.
The spread had touched its widest since July at -53.7 basis points.