Loonie Soars as the Canadian Economy Firms While U.S. Wobbles

(Bloomberg) -- The Canadian dollar is on pace for its highest close in eight months as trade data add to evidence the $1.7 trillion economy is firming, just as the U.S. wobbles.

The loonie rose as much as 0.3% to 76.54 U.S. cents by 1:19 p.m., near the highest closing mark since Oct. 24. The currency has gained 4.3% against the U.S. dollar this year, the best performance among its Group of 10 peers.

A rebound in loonie has been brewing since early June after figures showing stronger-than-expected gross domestic product for April and business and consumer sentiment rising. On Wednesday, Statistics Canada reported the country unexpectedly swung to a trade surplus for the first time in 10 months in May as exports jumped.

In the U.S., investors are pricing in interest rate cuts from the Federal Reserve with even the labor market showing signs of cooling on Wednesday ahead of monthly payroll data on Friday.

The diverging paths are reflected in the biggest gap between the Canada's Citi Economic Surprise Index and the U.S. since 2008. Hedge funds and other speculators are also the least bearish on the currency since December, according to data from the Commodity Futures Trading Commission.

The strength in the Canadian dollar reflects expectations that the Fed will cut 50 basis points more than the Bank of Canada, said Mark Chandler, head of fixed income research at Royal Bank of Canada. RBC sees the loonie weakening to 1.35 per U.S. dollar or buying about 74 U.S. cents.

“But it is based upon the notion that both the Fed and the BOC will be on hold for the remainder of this year,” he said. “Obviously, this is at odds with market pricing.”

According to the median forecast of analysts polled by Bloomberg, the loonie is already about as high it will get by the end of the year. It's calling for 1.31 Canadian dollar per greenback.

--With assistance from Katherine Greifeld.

To contact the reporter on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;Jacqueline Thorpe at jthorpe23@bloomberg.net, Mark Tannenbaum

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