June 4, 2012 / 5:33 PM / 5 years ago

C$ closes slightly weaker; eye on BoC

3 Min Read

TORONTO (Reuters) - Canada's dollar touched a six-month low and ended slightly weaker against its U.S. counterpart on Monday, with investors nervous about Europe's debt crisis and the outcome of the Bank of Canada's interest rate announcement on Tuesday.

The Bank of Canada is widely expected to keep interest rates on hold given fears about the euro zone's debt woes and signs of weaker global growth. But traders were trying to gauge how much the central bank will tone down the hawkish language it used in April.

"The market's very nervous about the Bank of Canada tomorrow," said Steve Butler, director of foreign exchange trading at Scotiabank.

"Last time they came out and they surprised everybody with some hawkish rhetoric, and I think the market's very concerned that tomorrow morning we may see the exact opposite, and the Bank may have to reverse their stance."

The prospect of higher interest rates tends to help currencies strengthen by attracting international currency flows. The Bank of Canada's main policy rate has been at 1 percent since September 2010.

"We've seen a fair bit of back and forth movement in the currency," said Matt Perrier, director of foreign exchange sales at BMO Capital Markets.

"I think we'll stick to a fairly tight range here overnight, the C$1.0380-C$1.0425 area, as we head into the Bank of Canada announcement."

The currency closed at C$1.0397, versus the U.S. dollar, or 96.18 U.S. cents, down from Friday's close at C$1.0394 versus the greenback, or 96.21 U.S. cents.

The currency at one point hit C$1.0446, its weakest level since late November.

The Canadian dollar is likely to trade in a range of C$1.0350 to C$1.0450 until events later in the week provide further clarity, said Shaun Osborne, chief currency strategist at TD Securities.

Investors are also waiting to see if policy meetings by the European Central Bank and the Bank of England this week will produce any sign that another wave of easing is likely.

On Thursday, U.S. Federal Reserve Chairman Ben Bernanke testifies before a congressional committee about the U.S. economy, which could offer more clues about possible policy shifts.

Canadian government bond yields were mostly higher on Monday after hitting record lows at the long end of the curve on Friday.

Canada's benchmark 10-year bond fell 51 Canadian cents to yield 1.686 percent, after hitting a record low of 1.615 percent at the end of last week. The two-year bond dropped 21 Canadian cents to yield 0.979 percent.

Editing by Jeffrey Hodgson

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