Canada dollar advances after Bank of Canada keeps hike bias

Tue Dec 4, 2012 5:29pm EST
 

By Solarina Ho

TORONTO (Reuters) - The Canadian dollar strengthened against the U.S. dollar on Tuesday after the Bank of Canada kept interest rates on hold, but reiterated its view that it will need to tighten policy over time.

The central bank held its overnight lending rate steady at 1 percent, as expected - the longest period of BoC inactivity since the early 1950s. Investors were focused on the bank's language for any indication that its intent to tighten monetary policy had shifted.

Bank of Canada Governor Mark Carney, who recently said he will take the reins at the Bank of England next July, has been signaling a need to raise the main policy rate since April, making Canada the only industrialized economy to lean toward a rate increase.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the announcement traders scaled back their small bets on a rate cut in 2013.

"The Canadian dollar has had a certain amount of volatility today ... most of it on the Bank of Canada guidance," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

The Canadian dollar finished Tuesday's session at C$0.9932 against the U.S. dollar, or $1.0068, compared with C$0.9949, or $1.0051, at Monday's North American close.

Camilla Sutton, chief currency strategist at Scotiabank noted the Canadian dollar has held back while other currencies rallied, but could now strengthen over the next few weeks to C$0.9750, or $1.0256.

"The Canadian dollar wasn't (rallying) as it was waiting for the Bank of Canada risk to pass. Now that it's passed, this type of steady-as-she-goes statement opens up the potential for Canadian dollar strength," Sutton said.   Continued...