Hawkish central bank supports C$, hits some debt

Tue Oct 23, 2012 11:40am EDT
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By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar held steady versus the U.S. currency while short-term debt prices fell on Tuesday after the Bank of Canada surprised markets by largely retaining its hawkish view that interest rates should be raised over time.

The central bank, highlighting soaring household debt, repeated much of the rate-hike language that has made it an outlier among major economies, while making the time frame for rate hikes less definite.

The Canadian dollar had weakened after Governor Mark Carney omitted reference to the central bank's tightening bias in a speech a week ago.

"Obviously they kept the hawkish bias, which I think took the markets by surprise, so we've had a rally in the Canadian dollar," said Camilla Sutton, chief currency strategist at Scotiabank.

The currency traded as strong as C$0.9901 to the greenback, or $1.0099, after the central bank statement, from C$0.9970 just before.

But by midday it had weakened back to C$0.9926 versus the US$, or $1.0075, unchanged from Monday's close.

While the bank's growth and inflation outlook was slightly more downbeat, the relatively positive overall tone and absence of any commentary on Europe surprised some investors.

"It was a little odd because data right now is not really supportive of rate hikes ... the U.S. is still muddling along, Europe is in a recession and Chinese growth is a little slower than expected," said Darcy Briggs, a Calgary-based fixed-income fund manager with Bissett Investment Management, a unit of Franklin Templeton.   Continued...