CANADA FX DEBT-C$ falters on Greece politics, CMHC
* C$ at C$0.9983 vs US$, or $1.0017 * Risk assets slide on Greek uncertainty * CMHC predicts interest rates on hold this year * Bond prices push higher across curve By Jennifer Kwan TORONTO, May 8 (Reuters) - Canada's dollar fell against its U.S. counterpart on Tuesday as Greece struggled to form a new government and investors worried about Europe's ability to fend off a deeper crisis in the region. Canada Mortgage and Housing Corp's (CMHC) prediction that central bank interest rates will stay on hold this year also proved to be a key factor weighing on the currency. Canada's dollar had risen sharply following a more hawkish stance by the Bank of Canada last month. The central bank surprised investors with a more positive domestic economic outlook and an explicit warning that it may have to start raising interest rates again, pushing up the Canadian currency. But in recent sessions and following the CMHC comments the market has pulled back on expectations of a rate increase, said Ian Pollick, fixed income strategist at RBC Capital Markets. The CMHC's statement that it expects the Bank of Canada to hold rates steady for the year dimmed market expectations of a rate increase, Pollick said, placing even greater emphasis on the global situation. "European conditions are continuing to unfold on the sour side. People are coming to the realization that maybe we got ahead of ourselves," he said. The Bank of Canada has frozen rates at 1 percent since September 2010 after it became the first in the G7 to raise borrowing costs from lows hit during the financial crisis. The Canadian dollar dropped to a low of C$1.0023 against the greenback, or 99.77 U.S. cents, its lowest since April 16. By 2:00 p.m. (1800 GMT), it was at C$0.9983 versus the U.S. dollar, or $1.0017, down from Monday's finish at C$0.9930 versus the U.S. dollar, or $1.0070. Global equity, currency and commodity markets were rattled after a call to form a new government for Greece included a renunciations of the terms of a bailout that is keeping the country's finances afloat. "The Canadian dollar is lower because of increased risk aversion and that entirely relates to European political developments as the Greek election result continues to filter through the market," said Fergal Smith, managing market strategist at Action Economics. "The idea that ... the anti-bailout party is going to try to form a government, the possibility that they'll default on bond payments and ultimately the risk that they'll be forced to exit the (European monetary union)." Smith noted resistance for the U.S. dollar against Canada's was still in place around parity to C$1.0050. Surprising strong data on Canadian housing starts, led by a surge in condominium construction that added to concern about a possible housing bubble, cushioned the currency's fall. Canadian bond prices outperformed U.S. Treasuries across the curve, with Canada's 2-year bond up 9 Canadian cents to yield 1.228 percent, while the benchmark 10-year bond gained 47 Canadian cents to yield 1.970 percent.
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