The Canadian dollar CADUSD steadied against its U.S. counterpart on Thursday, with the currency holding onto its first-quarter gains as investors cheered Canada’s potential combination of increased government spending and interest rate hikes.
The loonie was nearly unchanged at 1.2483 to the greenback, or 80.11 U.S. cents, after trading in a range of 1.2465 to 1.2533.
On Wednesday it touched its strongest intraday level in nearly five months at 1.2427. For March, it was up 1.5%, while it has advanced 1.2% since the start of the year.
Loose fiscal policy combined with tight monetary policy is a good “prescription” for a stronger currency, said Tony Valente, senior FX dealer at AscendantFX.
Canadian Prime Minister Justin Trudeau’s surprise political deal this month with the smaller left-leaning New Democrats could lead to an increase in spending that further fuels inflation. The government is due to present the budget for the upcoming fiscal year next Thursday.
Meanwhile, investors are betting that the Bank of Canada will begin hiking its key interest rate in half-percentage-point increments, with the first of the rarely used upsized moves possibly coming as soon as April 13.
“The market realizes that the Bank of Canada will, at the very least, match the Fed (Federal Reserve) hike by hike,” Valente said.
A preliminary estimate showed Canada’s economy growing 0.8% in February, prompting economists to revise up first-quarter projections.
The price of oil, one of Canada’s major exports, settled nearly 7% lower at $100.28 a barrel, as President Joe Biden launched the largest release ever from the U.S. emergency oil reserve in an attempt to lower gasoline prices that have soared during Russia’s war with Ukraine.
Canadian government bond yields eased across the curve, tracking the move in U.S. Treasuries. The 10-year dipped 4.1 basis points to 2.396%, after touching on Tuesday its highest level in more than three years at 2.607%.
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