TORONTO, Aug 14 (Reuters) - The Canadian dollar strengthened to a two-month high against its U.S. counterpart on Friday as domestic factory data supported recent narrowing in the gap between U.S. and Canadian bond yields.
The loonie was trading 0.4% higher at 1.3875 per U.S. dollar, or 72.07 U.S. cents, after touching its strongest intraday level since June 3 at 1.3865. For the week, the currency was up 0.5%, putting it on track for its third straight weekly gain.
"The retrenchment in Fed tightening expectations — which has further to go, we believe — has driven a significant narrowing in front-end spreads since the end of July," Shaun Osborne and Eric Theoret, strategists at Scotiabank, said in a note.
The gap between Canada's 2-year yield and the U.S. equivalent has narrowed by about 17 basis points this month to 120 basis points in favor of the U.S. note.
"At the margin, Friday's disappointing U.S. retail sales data and the better-than-expected Canadian manufacturing sales data sustain the recent shift in the trend of relative data surprises ... which will also feed through to the exchange rate," the strategists said.
Canadian factory sales grew 0.1% in June from May, the fifth straight month of gains, while sales volumes were up 1.2%.
Separate data showed wholesale trade rising by 2.8% in June.
The U.S. dollar fell against a basket of major currencies after data showed U.S. retail sales unexpectedly declined in July.
The price of oil , one of Canada's major exports, was trading 0.8% higher at $81.88 a barrel after the U.S. threatened an indefinite naval blockade of Iran, raising concerns about disruptions to crude supplies from the Middle East.
Canadian government bond yields moved higher across a steeper curve, tracking moves in U.S. Treasuries. The 10-year was up 5.5 basis points at 3.681%, but holding below the two-year high it touched on Tuesday at 3.755%.
Reporting by Fergal Smith; Editing by Paul Simao
