October 23, 2012 / 1:47 PM / in 5 years

CANADA FX DEBT-C$ stronger as central bank keeps rate hike in view

* C$ at C$0.9902 versus the US$, or or $1.0099

* Bank of Canada largely holds to hawkish line on rates

* Global weakness offsets C$ gains vs US$

By Alastair Sharp

TORONTO, Oct 23 (Reuters) - The Canadian dollar sharply strengthened versus the U.S. currency on Tuesday after the Bank of Canada largely retained its hawkish view that interest rates should be raised over time.

The currency had been weakening ever since the governor of the central bank had omitted reference to a tightening bias in a speech a week ago, but reversed course after the bank only slightly toned down its rate hike bias and flagged household debt as a concern.

“Obviously they kept the hawkish bias, which I think took the markets by surprise, so we’ve had a rally in the Canadian dollar,” said Camilla Sutton, chief currency strategist at Scotiabank.

The currency traded as strong as C$0.9902 to the greenback, or $1.0099, after the central bank statement, compared with C$0.9970, or $1.0030 just before. It had closed Monday’s North American session at C$0.9926, or $1.0075.

The move was partly muted as investors globally have flocked to the safe haven U.S. dollar after lacklustre corporate earnings and a downgrade of Spanish regions re-ignited fears about the health of the world economy.

“Given the fact that we’ve got a pretty sour mood in the global markets today, that’s a pretty important move by the Canadian dollar,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian currency was bolstered against a string of major currencies, including the euro, the British pound, the Swiss franc and the Australian dollar.

The Bank of Canada news also played havoc with the price of shorter duration government debt, while longer-term bonds seems inured by broader caution.

The two-year bond was off 8 Canadian cents to yield 1.136 percent, while the benchmark 10-year bond rose 18 Canadian cents to yield 1.853 percent.

“The long end is still being supported by a bit of weakness in other financial markets today more broadly, but the short end got walloped by this,” BMO’s Porter said.

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