CANADA FX DEBT-C$ near two-week low as Carney speech weighs

Tue Oct 16, 2012 11:49am EDT
 
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* C$ at C$0.9854 to US$, or $1.0148
    * Bank of Canada omits hawkish language
    * Positive corporate earnings, Canada data lend support

    By Alastair Sharp
    TORONTO, Oct 16 (Reuters) - The Canadian dollar hit its
weakest level in nearly two weeks against its U.S. counterpart
on Tuesday, after a Bank of Canada speech omitted mention of a
long-stated intention to raise interest rates once conditions
permit.
    Governor Mark Carney said on Monday that the central bank
would take whatever action is necessary to keep inflation on
target and acknowledged the effect global uncertainty was having
on Canada's resource-linked economy. 
    But the speech omitted key hawkish language about withdrawal
of "considerable monetary policy stimulus."
    The Canadian dollar was initially little changed as analysts
tried to gauge whether Carney was simply refraining from
including forward-looking language ahead of the bank's Oct. 23
interest rate decision or abandoning the monetary tightening
bias altogether.
    But the currency slid overnight as traders decided the event
was a dovish signal.
    "It pretty much wrung out any rate expectations that were in
place for next year," said Mark Chandler, head of Canadian fixed
income and currency strategy at Royal Bank of Canada. "There was
a bit of a delayed reaction in currency markets."
    
    RATE HIKE BETS PULLED
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that traders have
eliminated their bets on a rate hike in 2013. 
    "Clearly the market is still reacting to the comments from
Carney yesterday. That's continuing to weigh on the Canadian
dollar," said Jeremy Stretch, head of foreign exchange strategy
at CIBC World Markets in London.
    By 10:49 a.m. (1449 GMT) the Canadian dollar was at
C$0.9854 to the U.S. dollar, or $1.0148, compared to C$0.9800,
or $1.0204, at Monday's North American close. It hit C$0.9880 in
early trade, its weakest level since Oct. 3.
    The currency won back some value after strong Canadian
factory and investment data.
    Canadian manufacturing sales rebounded much more sharply
than expected in August after a two-month slump, on the back of
a resurgent energy sector. 
    Foreigners upped their interest in Canadian securities in
the same month, investing almost C$7 billion with a focus on
corporate bonds and money market instruments. 
    A trend toward investment in Canada is supportive of the
Canadian dollar.
    
    BOND PRICES WEAKER
    Canadian government bond prices were broadly lower, hurt by
a rebound in appetite for riskier assets that drove North
American equities higher.  
    But Carney's speech helped boost the prices of shorter-term
T-bills, and Canadian government bonds outperformed U.S.
Treasuries. 
    The two-year bond lost 1 Canadian cent to yield
1.085 percent, while the benchmark 10-year bond fell
20 Canadian cents to yield 1.819 percent.
    The sudden resignation of Ontario Premier Dalton McGuinty
had little impact on the price of the province's debt. The yield
on Ontario's 10-year bond traded 94 basis points above its
Canadian government counterpart, little changed from Monday.
  
    RBC's Chandler ascribed the lack of reaction to government
forecasts earlier on Monday showing Canada's most populous
province is reducing its budget deficit faster than
projected.