CANADA FX DEBT-C$ extends January gains as U.S. wage pressures ease

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Canadian dollar strengthens 0.6% against the greenback

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For the month, it was up 1.9%

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Canadian economy likely grows 1.6% in fourth quarter

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Canada-U.S. 2-year spread narrows by 8.3 basis points

TORONTO, Jan 31 (Reuters) – The Canadian dollar
strengthened against its U.S. counterpart on Tuesday, adding to
its gains since the start of the year, as investors cheered U.S.
data showing labor costs increasing at a slower pace.

The loonie was trading 0.6% higher at 1.33 to the
greenback, or 75.19 U.S. cents, at near its strongest level in
more than two months, which it touched on Monday at 1.3297.

For January, it was up 1.9%, its biggest monthly advance
since October 2021, as signs of easing inflation bolstered risk
appetite.

U.S. labor costs increased at their slowest pace in a year
in the fourth quarter as wage growth slowed, giving the Federal
Reserve, which is due to make an interest rate decision on
Wednesday, a boost in its fight against inflation.

“It’s an encouraging development for the Fed … that helped
to support equity markets,” said Mazen Issa, a senior FX
strategist at TD Securities. “There is a pretty strong
relationship between equity markets currently and FX markets,
including the CAD.”

Major U.S. stock indexes rose, the U.S. dollar fell
against a basket of major currencies and the price of oil, one
of Canada’s key exports, settled 1.25% higher at $78.87 a
barrel.

The Canadian economy grew 0.1% in November, matching
forecasts, while a preliminary estimate showed a flat reading
for December and annualized gross domestic product in the fourth
quarter was likely up 1.6%, above the Bank of Canada’s forecast
of 1.3%.

Canadian government bond yields rose across the curve.

The 2-year was up 2.9 basis points at 3.774%,
while the gap compared to the equivalent U.S. rate narrowed by
8.3 basis points to about 43 basis points in favor of the U.S.
bond.
(Reporting by Fergal Smith
Editing by Alistair Bell and Will Dunham)