WRAPUP 2-Canada dollar surges, stocks erase gains after rate hike

* Canadian dollar at C$1.2737, or 78.51 U.S. cents

* C$ hits highest since June 2016

* Two-year bond yield at highest since October 2013
(Updates market levels, adds comment)

By Solarina Ho and Fergal Smith

TORONTO, July 12 (Reuters) – The Canadian dollar surged to
its highest level in more than a year against the greenback on
Wednesday and key bond yields rallied on anticipation of more
hikes to come after the central bank raised interest rates for
the first time since 2010.

But concerns that the 25-basis-point rate increase would hit
consumer spending, raise borrowing costs and hurt exporters
weighed on some pockets of the stock market.

“We’re moving off generationally low rates,” said Paul
Taylor, CIO of fundamental equities at BMO Asset Management Inc.

“The Bank of Canada rate decision was a bit of sobering news
for the Canadian market.”

The rate increase was widely anticipated but the upbeat
statement supported the view of more hikes in coming months,
even though it said future moves would be guided by economic
data given “continued uncertainty and financial system

“It is a story about the (Canadian) dollar and can our
exports compete,” said John Stephenson, president & chief
executive at Stephenson & Company Capital Management. “The
market is looking out there and asking will it hurt our
competitiveness, hurt the (construction) sector in the economy
that is hot.”

The loonie has soared some 6 percent since the Bank of
Canada turned hawkish in June, while yield on the country’s
2-year bond has jumped nearly 0.5 percentage point. Data from
the overnight index swaps market indicated a greater than 80
percent chance of another rate increase by December.

The Canadian dollar notched it biggest percentage
gain since March 2016 and was last trading at C$1.2737 to the
greenback, or 78.51 U.S. cents, up 1.4 percent.

The currency touched C$1.2681, its highest since June 23,
2016, while 2-year yields hit their highest since October 2013
at 1.201 percent.

In contrast, U.S. Treasury yields fell after Federal Reserve
Chair Janet Yellen dampened expectations for a U.S. interest
rate hike this year and in 2018.

Canada’s main stock index rallied nearly 1 percent in line
with U.S. markets before the rate announcement but later
retreated from session highs, also due in part to company news
and seesawing crude oil prices.
The Toronto Stock Exchange’s S&P/TSX composite index
finished down 5.15 points, or 0.03 percent, to
15,143.99, reversing the session’s gains.

Some retail stocks fell on worries that Canada’s
highly indebted consumers could feel squeezed by higher interest
rates. Canadians owe C$1.67 for every dollar of income, a
near-record high.

Canada’s biggest banks raised their prime lending rates in
response to the central bank move. Higher rates are expected to
boost banks’ profit margins.

(Reporting by Solarina Ho and Fergal Smith; Editing by Meredith