Canadian dollar rallies as BoC forgoes adding to quantitative easing

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a six-day high against the greenback on Wednesday as investors grew more optimistic about a COVID-19 vaccine and the Bank of Canada decided against increasing the pace of its bond purchases.

Canada's economic activity will not return to pre-pandemic levels until 2022, the central bank said, promising to keep interest rates at 0.25%, a level it considers the floor, until economic slack is absorbed.

The "forward guidance" on rates was too vague to undermine the loonie, said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.

At a time when markets are pricing in negative rates from some other major central banks, the Bank of Canada could be regarded as "relatively hawkish" by opting to keeping the current level of bond purchases unchanged, Harvey said.

The central bank is buying at least C$5 billion a week of Government of Canada bonds.

Wall Street approached its highest level in more than four months after a small-scale study by Moderna Inc showed its experimental COVID-19 vaccine produced high levels of virus-killing antibodies.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so the loonie tends to be sensitive to the global flow of trade and capital.

U.S. crude prices settled 2.3% higher at $41.20 a barrel, while the Canadian dollar was trading 0.8% higher at 1.3507 to the greenback, or 74.04 U.S. cents. The currency touched its strongest intraday level since last Thursday at 1.3505.

The gain for the loonie came as domestic data showed that factory sales jumped by a record 10.7% in May from April.

Canada's 10-year yield was nearly unchanged at 0.534%, while it traded 2 basis points further below the U.S. 10-year yield for a spread of 9.8 basis points.

(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)