September 5, 2012 / 8:58 PM / 5 years ago

C$ slides as global fears dwarf Quebec, BoC news

4 Min Read

TORONTO (Reuters) - The Canadian dollar weakened against the U.S. currency and euro on Wednesday as investors focused on European monetary policy and global economic growth, eclipsing the impact of a Bank of Canada rate decision and an election in French-speaking Quebec.

The Bank of Canada left its main policy rate unchanged but stuck to its tightening bias, while the separatist Parti Quebecois resumed power in the province of Quebec, snagging enough seats in Tuesday's election to form a minority government.

But currency traders were more concerned with a key European Central Bank meeting on Thursday. A report that the ECB may buy an unlimited amount of government bonds issued by debt-plagued countries fueled buying in the euro against the U.S. dollar and commodity-linked currencies, including the Canadian dollar. <FRX/>

"It's the global drivers that are probably the most important," said Camilla Sutton, chief currency strategist at Scotiabank.

"What the ECB decides tomorrow, as well as the global growth outlook ... we have seen some signs that there has been some deterioration, those are the ... broader drivers of Canada overall."

Bank of Canada Remains Hawkish

The Bank of Canada kept its main policy rate at 1 percent, as expected, and reiterated its message that it may have to raise interest rates, despite a global slowdown, due to expectations the domestic economy will gain momentum this year and next.

The Canadian dollar pared some losses immediately after the rate decision, before sliding further to hit a session low of C$0.9919 against the U.S. dollar, or $1.0082.

The central bank's hawkish tone stands in contrast to that of the U.S. Federal Reserve and other central banks, which have been contemplating further stimulus moves. But most market players expect the Bank of Canada to hold steady on rates until at least 2013. <CA/POLL>

"There wasn't much meat on these bones ... And I think that's exactly what the bank wants. I don't think they were trying to send any big message here," said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian dollar closed at C$0.9909 versus the U.S. dollar, or $1.0092, weaker than Tuesday's North American finish at C$0.9858, or $1.0144.

Quebec Bonds Outperform

The Quebec election had limited currency impact, with the market having priced in a minority victory by the Parti Quebecois over the governing Liberals. The minority government status effectively ruled out the possibility of the government holding another referendum to separate from Canada in the near term.

"I think that (Parti Quebecois leader Pauline Marois) will be a reasonable steward of the economy ... especially from a bondholders' perspective," Ed Devlin, head of Canadian portfolio management at bond fund giant PIMCO, said in an interview with BNN television.

The gap between Canadian and Quebec government bond yields narrowed, an indication that investors felt more comfortable with the province's debt and were demanding less of a risk premium.

The yield on Quebec's benchmark 30-year government bond was 121 basis points above its Canadian counterpart on Wednesday, down from 123 basis points before the election results were announced.

Canadian government bonds were mixed, with the two-year bond up 1 Canadian cent to yield 1.112 percent. The benchmark 10-year bond price was down 19 Canadian cents, to yield 1.758.

Additional reporting by Alastair Sharp; Additional writing by Jeffrey Hodgson; Editing by Peter Galloway; Editing by Peter Galloway

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