CANADA FX DEBT-C$ rises on BoC policy news, but Spain trims gain

Tue Jun 5, 2012 4:50pm EDT
 
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* C$ ends at C$1.0380 vs US$, or 96.34 U.S. cents
    * BoC only modestly tones down hawkish language
    * Spain's banking woes weigh on markets
    * Bond prices mostly lower

    By Jon Cook	
    TORONTO, June 5 (Reuters) - The Canadian dollar firmed
against its U.S. counterpart on Tuesday, boosted by signals the
Bank of Canada is still more inclined to raise rates than cut
them, but the rise was limited by concerns about Spain's
debt-laden banks.	
    The language of the Bank of Canada's scheduled interest rate
announcement on Tuesday had a less hawkish tone than its policy
statement in April. The central bank acknowledge deteriorating
economic conditions abroad, as it kept its key policy rate at 1
percent. 	
    However, the statement was still more hawkish than many
market players had expected, as the central bank did not remove
the possibility of a rate increase further down the road should
the Canadian economy maintain its momentum. 	
    "The statement did seem to point towards that the next move
here, in their mind, will be a rate hike," said Shane Enright,
executive director, foreign exchange sales at CIBC World
Markets.	
    Repeating language used in April, the central bank said
"some modest withdrawal of the present considerable monetary
policy stimulus may become appropriate," though it qualified
this by saying it depended on continued economic growth.	
    The Canadian currency strengthened near its overnight high
of C$1.0361 against the U.S. dollar, or 96.52 U.S. cents, before
falling back later in the session. It was around C$1.04 prior to
the Bank of Canada announcement.	
    The prospect of higher interest rates tends to help
currencies strengthen by attracting international capital flows.
The Bank of Canada's main policy rate has been at 1 percent
since September 2010.	
    The Canadian dollar, which outperformed most major
currencies, finished at C$1.0380 against the U.S. dollar, or
96.34 U.S. cents. It was up slightly from Monday's close at
C$1.0397 versus the greenback, or 96.18 U.S. cents.	
    The boost from the Bank of Canada announcement was limited
by fears about the state of Spain's fragile banking sector.	
    The euro fell as Spain's treasury minister said high
borrowing costs were closing the country off to credit markets
and investors received scant comfort from an emergency
conference call of Group of Seven finance chiefs. 	
    "The vulnerability of markets and the volatility
predominately out of Europe will continue to weigh on a currency
like Canada," said Jack Spitz, managing director of foreign
exchange at National Bank Financial. "I would expect
dollar-Canada to trade more sideways."	
    Enright said the currency would likely trade between
C$1.0350 and C$1.0450 for the near term, pending signals of
further stimulus measures from Wednesday's European Central Bank
policy meeting and U.S. Federal Reserve chairman Ben Bernanke's
testimony to the U.S. Congress on Thursday.	
    Further out from that, market watchers were looking ahead to
Greek elections and a G20 meeting in Mexico, both on the weekend
of June 17.	
    Canadian bond markets were mostly lower. Canada's two-year
bond fell 4 Canadian cents to yield 0.993 percent,
while the benchmark 10-year bond dropped 57 cents to
yield 1.737 percent.