CANADA FX DEBT-C$ slips near 2-week low on Bank of Canada speech

Tue Oct 16, 2012 4:52pm EDT
 
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* C$ ends at C$0.9868 vs US$, or $1.0134
    * Bank of Canada omits hawkish language
    * Canada economic, investment data lends support
    * Ontario bond spreads steady after premier resigns

    By Claire Sibonney
    TORONTO, Oct 16 (Reuters) - The Canadian dollar touched its
lowest level against the U.S. dollar in nearly two weeks on
Tuesday and underperformed other major currencies after a Bank
of Canada speech dropped any reference to the bank's long-stated
rate-hiking stance.
    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" once conditions
permit.
    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 interest
rate decision and quarterly monetary policy report next week, or
if the bank was abandoning the monetary tightening bias
altogether.
    But the currency slid overnight as traders decided the
omission was a dovish signal.
    "We had a very delayed reaction to Carney, which makes it
suspicious," said Camilla Sutton, chief currency strategist at
Scotia Capital. "However, I think it is true that Carney changed
his tone from hawkish to less hawkish and implied that he would
be revising forecasts and likely the tone of the statement." 
    Sutton noted that the Mexican peso was also lagging,
which pointed to a general U.S. bet against the other NAFTA
currencies.
    
    RATE HIKE BETS PULLED
    However, pared-back interest rate expectations for Canada
supported the broad view that Carney's speech was still driving
markets. 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.
 
    The Canadian dollar ended the North American
session at C$0.9868 to the U.S. dollar, or $1.0134, compared
with C$0.9800, or $1.0204, at Monday's 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. 
    
    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 for a second day. 
    "That had an impact on the two-year part of the Canada
curve, where we saw buyers emerge following his speech," said
Claudio Ferri, senior fixed income portfolio manager at State
Street Global Advisors in Montreal. "That part of the Canadian
curve had been dead for weeks."
    The two-year bond was off 1 Canadian cent to
yield 1.085 percent, while the benchmark 10-year bond
 fell 25 Canadian cents to yield 1.824 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 about 94 basis
points above its Canadian government counterpart, little changed
from Monday.  
    Analysts attributed 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. 
    "The major worry as a debt holder, as an investor, is 'are
the Liberals losing footing?' Maybe, but I don't think we've
seen strong evidence of that yet," Ferri said. 
    The news will only add to the scrutiny by investors and
ratings agencies of the province's efforts to tackle its budget
deficit. Those moves have included tough negotiations with
teachers and health care workers over their pay.
    Following McGuinty's surprise news, the three major ratings
agencies - DBRS, Standard & Poor's and Moody's - told Reuters
that their outlooks on the province were unchanged.
    Moody's, which has a higher rating for Ontario than the
other two agencies, downgraded Ontario's debt in April, while
S&P warned it might do the same. 
    Jennifer Wong, Moody's lead analyst on the province, said
any reaction to the resignation would just be speculation.
    "We'd have to see whether there are any changes to the
fiscal plan and whether there are any credit implications with
any change in leadership."