CANADA FX DEBT-C$ drops on weak Canadian GDP data

Mon Apr 30, 2012 4:43pm EDT
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* C$ ends at C$0.9879 vs US$, or $1.0122
    * Ends up 1 percent for month
    * Canadian economy unexpectedly shrinks in Feb
    * Bond prices move higher across curve

    By Jennifer Kwan	
    TORONTO, April 30 (Reuters) - The Canadian dollar stumbled
against its U.S. counterpart and domestic bond yields retreated
on Monday after data showed the economy unexpectedly shrank in
February, coo ling expectations that the Bank of Canada will soon
resume raising interest rates.	
    Canada's gross domestic product contracted by 0.2 percent in
February from January, data showed, surprising analysts who had
expected a 0.2 percent increase. 	
    "Blood and guts all over the street today," said Steve
Butler, managing director of foreign exchange trading at
Scotiabank, of the move in the Canadian currency.	
    "The market was expecting maybe a little bit of a
disappointment on the GDP and we got a lot of disappointment."	
    He added he was a little surprised by the market's strong
reaction, but said month end flows could be exaggerating the
    The Canadian currency also tracked a fall in global stock
markets on data showing Spain slipped into recession and the
U.S. economy appeared to be slowing.  	
    The Canadian dollar finished at C$0.9879 versus the
U.S. dollar, or $1.0122, down from Friday's finish at C$0.9810
versus the U.S. dollar, or $1.0194.	
    The Canadian dollar, which hit seven-month high on Friday,
was still up 1 percent for the month, its best monthly gain
since February.	
    Canada's currency has been supported in the last two weeks
by ramped-up expectations of interest rate hikes by the Bank of
Canada. The central bank surprised investors with a more
positive domestic economic outlook and an explicit warning that
it may have to start raising rates again.	
    That message was reiterated on Monday in a speech in Ottawa
by Bank of Canada Deputy Governor Timothy Lane. 	
    The more-hawkish-than-expected central bank had caused a
significant widening in two-year bond spreads between Canada and
the United States. The spread hit a 2012 high above 115 basis
points last week. It has since dipped to around 108 basis
    Following the data on Monday, however, bond prices jumped
and yields dropped, while the pricing of overnight index swaps
also showed traders had cut back prospects of rate increases for
the remainder of the year. 	
    "The market, in my mind, got carried away from comments by
(Bank of Canada Governor) Carney," said Butler, "all of a sudden
pricing in rate cuts this year, more than one potentially, was
much, much too aggressive. I think the market is feeling a
little bit of that today."	
    Carney has spoken about the country's economic outlook on
several occasions this month. 	
    Canadian government bonds outperformed their U.S.
counterparts across the curve following the negative surprise in
Canada's February GDP. 	
    The rate-sensitive two-year bond rose 17 Canadian
cents to yield 1.343 percent, while the benchmark 10-year bond
 climbed 35 Canadian cents to yield 2.047 percent.