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Loonie Strengthens to One-Year High After Canada Raises Rates

The Canadian dollar jumped to a one-year high after the central bank raised interest rates for the first time since 2010.

Canada on Wednesday became the first Group-of-Seven member to join the U.S. in tightening amid growth that’s forecast to be the fastest in the developed world. While the move was anticipated by most economists surveyed by Bloomberg, traders were surprised when policy makers downplayed weak inflation and said the output gap will close earlier than previously projected.

“The market is wrestling with the fact they are much more upbeat on growth and their view that the downturn in inflation is temporary,” said Daniel Wilson, a New York-based markets economist at ANZ Banking Group Ltd. “While we might see some more follow-through, further gains in the Canadian dollar will be much harder to come by now.”

The loonie gained 1.7 percent to C$1.2704 as of 1:50 p.m. in Toronto, extending its advance in the past month to 4.9 percent, the biggest increase among 31 major currencies tracked by Bloomberg. It touched C$1.2681 earlier, its strongest level since June 2016.

Canadian government bonds fell, pushing short-term yields up more than those on long-term securities, even as sovereign bonds rose globally. The yield on the country’s two-year government bond surged seven basis points to 1.2 percent, the highest since 2013. Five-year bond yields added five basis points to 1.5 percent, while the rate on 10-year securities rose three basis points to 1.88 percent.

“The Bank of Canada is by no means done in terms of the work they have to do,” said David Stonehouse, a Toronto-based portfolio manager who helps oversee C$6 billion in fixed-income assets at AGF Management Ltd. “There’s enough strength and enough justification to see a continuation of the move, both with respect to short-term rates and the Canadian dollar.”

The stock reaction was muted. The S&P/TSX Composite Index rose as much as 1 percent before the central bank decision was announced, later giving up much of those gains. However, this appeared to have more to do with a drop in crude oil prices following the release of U.S. energy data rather than the rate hike.

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