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CANADA FX DEBT-C$ nears 10-month high as jobs gain boosts rate hike chances

* Canadian dollar at C$1.2894, or 77.56 U.S. cents

* Loonie touches its strongest since Sept. 8 at C$1.2888

* Bond prices lower across a steeper yield curve

* 10-year yield reaches a two-year high at 1.886 percent

TORONTO, July 7 (Reuters) - The Canadian dollar strengthened on Friday to a nearly 10-month high against its U.S. counterpart after stronger-than-expected domestic jobs data boosted chances of an interest rate increase by the Bank of Canada as soon as next week. Canada's economy added 45,300 jobs last month, topping the 10,000 gain forecast by economists. The unemployment rate dipped to 6.5 percent, even as more people were looking for work.

"It is a pretty solid report ... if you were leaning toward a hike in July this would do nothing to dissuade you," said Andrew Kelvin, senior rates strategist at TD Securities. Chances of an increase at next week's rate meeting rose to 91 percent from 86 percent before the jobs report, data from the overnight index swaps market showed. Expectations of a rate increase have been rising since top Bank of Canada officials said in June that a pair of 2015 interest rate cuts had done their job in cushioning the economy from collapsing oil prices.

At 9:24 a.m. ET (1324 GMT), the Canadian dollar was

trading at C$1.2894 to the greenback, or 77.56 U.S. cents, up 0.7 percent. The currency's weakest level of the session was C$1.2994, while it touched its strongest since Sept. 8 at C$1.2888. The loonie strengthened even as prices of oil, one of Canada's major exports, fell.

U.S. crude was down 1.82 percent at $44.69 a barrel

after data showed U.S. production rose last week just as Organization of the Petroleum Exporting Countries exports hit a 2017 high, casting doubts on efforts by producers to curb oversupply.

The U.S. dollar rose against a basket of major

currencies after U.S. job growth surged more than expected in June and employers increased hours for workers, signs of labor market strength that could keep the Federal Reserve on course for a third interest rate increase this year despite benign inflation. Canadian government bond prices were lower across a steeper

yield curve, with the two-year down 4 Canadian cents to yield 1.165 percent and the 10-year falling 41

Canadian cents to yield 1.881 percent. The 10-year yield reached its highest intraday since June 2015 at 1.886 percent, while the gap between the two-year yield and its U.S. equivalent narrowed by 2.6 basis points to -23.8 basis points, its narrowest since Oct. 18, as Canadian government bonds underperformed.

(Editing by Steve Orlofsky)