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Canada dollar hits highest level since May 1998

TORONTO: The Canadian dollar surged to its highest level since May 1998 on Friday as European and US investors scurried to place their bets on a currency that many see continuing to strengthen.

"It had a great little move there, didn't it?" said one Toronto currency trader with a major Canadian bank. "I think maybe people were expecting this thing to happen sooner or later, but it happened just a little bit sooner."

The Canadian dollar closed at C$1.4387 (69.51 US cents) early on Friday afternoon from Thursday's C$1.4468 (69.12 US cents) close. It reached levels not seen since May 13, 1998, according to Standard & Poor's MMS.

Its previous high for 2000 of C$1.4403 (69.43 US cents) was recorded on January 3.

The trader said the session began with "small" Canadian dollar selling after news that Canadian inflation was more subdued than expected in December.

Statistics Canada reported early on Friday that Canada's all-items consumer price index rose by 0.1 percent in December from the previous month -- slightly higher than the expected 0.1 percent decline -- and that core inflation fell by 0.1 percent in the same period. All-items inflation rose by 2.6% on a year-over-year basis in December, while while core inflation rose by 1.6%, below the expected 1.1% level.

The Canadian unit hovered around the C$1.4460 (69.16 US cents) level after the inflation news, but began to push rapidly higher later in the morning.

"People were talking about a German bank being around buying Canada, and that basically got it down from the C$1.4460 level down to the C$1.4430 level," the trader said.

US investment banks entered the market and began buying the Canadian aggressively, pushing it up to the C$1.4400 area.

"Some option-related barriers were triggered at level, and thus we got the follow through," the trader added.

After clambering as high as C$1.4378 (69.55 US cents), the currency grudgingly surrendered some of the ground it conquered so rapidly, sliding back slightly to close at C$1.4387.

"It happened pretty fast, and yet obviously Canada bulls have to be happy with it," the trader said. "With a close down around this C$1.4400 level people are probably going to be more convinced that Canada can catch up with its strong fundamentals," he added.

The Canadian dollar's energetic climb also reflects increased confidence that the Bank of Canada will match any interest rates from the US Federal Reserve in coming weeks, some analysts said.

Jeff Cheah, financial markets analyst with Standard & Poor's MMS, said a recent unwinding of large Canadian dollar puts in the options market suggested market players are revising their view of the Bank of Canada's policy stance.

"I think more and more people are starting to believe in the story that this time around if the Fed were to hike, and that's what we anticipate, then the Bank of Canada will match as well," he said.

That view has been buttressed by a string of robust economic indicators, Cheah said.

"I think that view, in combination with rising commodity prices, those two together are very compelling reasons to buy Canadian dollars," he said.

A speech from Bank of Canada Governor Gordon Thiessen scheduled for January 27 is also expected to reinforce the perception that the Canadian central bank will match the Fed, he added. "The general feeling is that the tone is not likely to be a dovish one," Cheah said.

Technically, the picture is encouraging for the Canadian dollar, he said.

"It's broken through a few very important supports, which suggest to me from a technical perspective, the bullish Canadian dollar/bearish US dollar trend is firmly in place," Cheah said.

The next critical targets for the currency are C$1.4310 and then C$1.4190, and they may be attainable within the next couple of months, he added.

In cross-trading against major currencies, the Canadian dollar was at 72.71 yen and at C$1.4526 against the euro. The Canadian dollar was at A$1.0468 against the Australian dollar.-Reuters