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

Tue Oct 16, 2012 1:51pm EDT
 
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* C$ at C$0.9858 to US$, or $1.0144
    * Bank of Canada omits hawkish language
    * Positive corporate earnings, Canada data lend support
    * Ontario bond spreads steady after premier resigns

    By Alastair Sharp and Claire Sibonney
    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 its
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
omission 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 12:45 p.m. EDT (1645 GMT) the Canadian dollar 
was at C$0.9858 to the U.S. dollar, or $1.0144, compared with
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 the release of strong
Canadian factory and investment data on Tuesday.
    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 supports the Canadian
dollar.
    
    ONTARIO DEBT STEADY AFTER SHOCK RESIGNATION
    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 half a Canadian cent to
yield 1.082 percent, while the benchmark 10-year bond
 fell 11 Canadian cents to yield 1.809 percent.
    The sudden announcement by Ontario Liberal Premier Dalton
McGuinty on Monday that he would resign had only a muted 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 in Ontario bond
spreads to the government's fiscal update on Monday, which
showed Canada's most populous province is reducing its budget
deficit faster than projected. 
    Hosen Marjaee, a bond fund manager at Manulife Asset
Management, said he was slightly surprised that Ontario bond
spreads held steady following McGuinty's resignation
announcement.
    "There are risks involved in terms of who's going to be the
new leader of the (Liberal) party, (whether) there's going to be
an election, who's going to win that election and whether
they're going to have more expansionary policies," he said.
    The news will only add to the scrutiny by investors and
ratings agencies of the province's efforts to curb its budget
deficit. Those efforts have included tough negotiations with
teachers and health care workers over their pay.
    "This is an usually volatile period in time and certainly
having a premier step down in the middle of this doesn't really
help, it adds to the uncertainty," said Mario Angastiniotis,  
Standard & Poor's lead Ontario analyst, who spoke to provincial
finance officials on Tuesday.
    "The status quo remains ... If we see changes in the
numbers, that's when we start reacting. So far the numbers are
ahead of budget," he added.
    The rating agency in April lowered its outlook on Ontario's
debt to "negative," while Moody's downgraded its rating.