01/17/2012 08:32 EST | Updated 03/18/2012 05:12 EDT

Loonie up on strong Chinese data, Bank of Canada leaves key rate unchanged

TORONTO - The loonie closed higher Tuesday after the Bank of Canada announced it would be leaving interest rates unchanged amid what it sees as worsening economic conditions outside Canada.

The loonie was up 0.27 of a cent at 98.5 cents US.

The bank observed that the Canadian economy did better than expected in the last half of 2011.

But it expects the pace of growth going forward will be more modest than previously forecast, largely due to deteriorating economic performance outside of Canada.

"The sovereign debt crisis in Europe has intensified, conditions in international financial markets have tightened and risk aversion has risen," the central bank noted.

It also said that the recession in Europe is now expected to be deeper and longer than it anticipated in October.

The main driver for the loonie Tuesday was commodity prices that took off in the wake of data from China showing stronger than expected growth.

China reported that the economy grew 8.9 per cent in the final quarter of last year, down from 9.1 per cent in the third quarter and the slowest in 2 1/2 years. But markets had been expecting growth to come in at 8.7 per cent and the data also showed that December retail sales and factory output accelerated.

There have been worries that Chinese officials would be unable to engineer a soft landing for the economy.

"Although we expect growth to downshift further in coming months as slower growth in Europe and other areas hits exports, other indicators are consistent with the view that the economy has cooled from early 2011’s exceptionally hot pace but is at little danger of falling off a cliff," said CIBC World Markets senior economist Peter Buchanan.

A growing Chinese economy has been an important source of support for a struggling global economy and in particular has boosted prices for oil and metals.

The Chinese data sent commodity prices up sharply with the February crude contract on the New York Mercantile Exchange up $2.01 to US$100.71 a barrel.

March copper gained nine cents to US$3.73 a pound while February gold bullion climbed $24.80 to US$1,655.60 an ounce.