October 24, 2018 / 6:47 PM / 19 days ago

CANADA FX DEBT-C$ notches one-week high on prospect of faster rate hikes

 (New throughout)
    * Canadian dollar rises 0.6 percent against the greenback
    * Bank of Canada hikes rate 25 basis points to 1.75 pct
    * Loonie touches its strongest since Oct. 17 at 1.2969 
    * Price of U.S. oil rises 0.7 percent
    * Canada-U.S. 2-year spread narrows by 8.7 basis points

    By Fergal Smith
    TORONTO, Oct 24 (Reuters) - The Canadian dollar strengthened
to a one-week high against its U.S. counterpart on Wednesday
after the Bank of Canada opened the door to a faster pace of
tightening as it raised interest rates, as expected, for the
fifth time since July 2017.
    The central bank increased its key interest rate by 25 basis
points to 1.75 percent and said it would continue to hike to at
least 2.5 percent to keep inflation in check, while it dropped
previous references to a gradual pace of tightening.
            
    "The Canadian dollar is reacting to the removal of gradual
from the Bank of Canada statement," said Adam Button, chief
currency analyst at ForexLive. "The market sees the changes in
the statement as a hint that rates could rise faster."
    The central bank targeted a neutral stance for interest
rates, which it estimates to be between 2.5 percent and 3.5
percent.   
    Money markets implied a policy rate of 2.43 percent in
December 2019, up from 2.37 percent before the rate
announcement.
    "The biggest question mark is how are households going to
react to the higher rates," said Darcy Briggs, a Calgary-based
portfolio manager at Franklin Bissett Investment Management.
    Elevated levels of household debt could leave Canada's
economy more sensitive than usual to higher interest rates.
Canada's household debt-to-income ratio rose to 169.1 percent in
the second quarter, near a record high.
    At 2:25 p.m. (1825 GMT), the Canadian dollar          was
trading 0.6 percent higher at 1.3009 to the greenback, or 76.87
U.S. cents. The currency touched its strongest level since Oct.
17 at 1.2969.
    Gains for the loonie came even as the U.S. dollar       
climbed to its highest in more than two months against a basket
of other major currencies.             
    The price of oil, one of Canada's major exports, rebounded
after several days of weakness as a much bigger-than-expected
drawdown in U.S. gasoline and diesel inventories augured for a
coming seasonal increase in refining demand.             
    U.S. crude oil futures        were up 0.7 percent at $66.90
a barrel.
    Canadian government bond prices were lower across much of a
flatter yield curve, with the two-year            down 9
Canadian cents to yield 2.321 percent and the 10-year
            falling 3 Canadian cents to yield 2.453 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 8.7 basis points to a spread of 53.0
basis points in favor of the U.S. note, its narrowest since Aug.
28.

 (Reporting by Fergal Smith; Editing by Bernadette Baum and
Steve Orlofsky)
  
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