CANADA FX DEBT-C$ pares gains after brief Bank of Canada bump

Wed May 29, 2013 11:23am EDT
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By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar was little changed after briefly firming against its U.S. counterpart on Wednesday after the Bank of Canada stuck to its view that rates will at some point need to move higher.

The loonie, as Canada's currency is colloquially known, gained in the initial aftermath of the 10:00 a.m. EDT (1400 GMT) announcement, which was also outgoing Governor Mark Carney's last rate decision.

While the central bank was widely expected to keep the policy rate and tightening bias unchanged, there had been speculation in some quarters it could be dropped, a decision which would likely have weakened the currency.

But after the initial gain, the currency soon sold off anyway, breaking through the C$1.04 barrier for the second straight session. It had not breached that level since June last year.

With a rate hike seen as far off into the future, the loonie seen likely to be more beholden to events in the United States, Canada's biggest trading partner, where the Federal Reserve is expected to at some point slow down its asset-purchasing program.

"Probably the bigger driver of the Canadian dollar is going to be developments south of the border. We've got the (Canadian) dollar weakening significantly in our forecasts, but a good part of that is likely due to U.S. dollar strength," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

The Bank of Canada decision balanced the impact of weaker-than-expected inflation data and more robust growth. Canada is still expected to lag its southern neighbor this year.

"Like any currency, what's more important is the relative performance between the Canadian and U.S. economies. Nothing has changed the story that Canada's economy is no longer the growth outperformer."   Continued...