Loonie notches four-week high as Bank of Canada cools rate cut bets

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened on Thursday to its highest in nearly a month against the greenback as data showed Canada's trade deficit narrowed and a Bank of Canada official expressed confidence in the economic outlook.

Bank of Canada Deputy Governor Timothy Lane said recent data supported the central bank's forecast that the economy's slowdown in the third quarter will be temporary.

On Wednesday, the central bank held its overnight interest rate at 1.75% as expected and cited early signs the global economy was stabilizing.

"Right now they (the Bank of Canada) seem to be okay with where the economy is," said Bipan Rai, North America Head, FX Strategy at CIBC Capital Markets. "It implies that the market shouldn't be pricing in a rate cut in January too aggressively."

Chances of an interest rate cut in January have fallen to less than 10% from 20% before Wednesday's rate decision, data from the overnight index swaps market showed.

Currency analysts polled by Reuters said the Canadian dollar will add to this year's gains over the coming 12 months as a potential easing of global economic risk reduces pressure on the Bank of Canada to support Canada's commodity-linked economy.

The price of oil, one of Canada's major exports, gave up its earlier gains. U.S. crude oil futures were down 0.1% at $58.40 a barrel. [O/R]

At 3:51 p.m. (2051 GMT), the Canadian dollar was trading 0.2% higher at 1.3177 to the greenback, or 75.89 U.S. cents. The currency, which notched on Wednesday its biggest gain in three months, touched its strongest intraday level since Nov. 6 at 1.3158.

The loonie has been the top-performing G10 currency this year, rising 3.6% against the greenback.

Canada posted a slightly narrower trade deficit in October of C$1.1 billion as both exports and imports climbed, Statistics Canada said. Exports rose by 0.8% to C$49.9 billion, while imports were up by 0.5%.

In separate data, the Ivey Purchasing Managers Index (PMI) rose in November to a three-month high at 60.0 from 48.2 in October.

Canada's jobs report for November is due on Friday.

Canadian government bond prices were lower across a steeper yield curve, with the benchmark 10-year falling 53 Canadian cents to yield 1.602%. The 10-year yield touched its highest intraday level since Nov. 12 at 1.624%.

(This story has been refiled to add name of strategist's bank)

(Reporting by Fergal Smith; Editing by David Gregorio and Tom Brown)