October 23, 2012 / 8:48 PM / in 5 years

CANADA FX DEBT-Rate-hike talk supports C$ amid market selloff

* Canada dollar ends at C$0.9927 vs US dollar, or $1.0074

* Bank of Canada largely holds to hawkish line on rates

* Global growth fears erase early C$ rally

By Claire Sibonney

TORONTO, Oct 23 (Reuters) - The Canadian dollar held steady against the greenback on Tuesday, outperforming most major currencies, while short-term debt prices fell after the Bank of Canada surprised markets with more rate-hike talk.

The central bank, highlighting soaring household debt, repeated much of the hawkish language that has made it an outlier among major economies, while making the time frame for rate hikes less definite.

The Canadian dollar had weakened after Governor Mark Carney omitted reference to the central bank’s tightening bias in a speech a week ago.

“On a day where risk assets have suffered mightily, the Canadian dollar has held its own following the Bank of Canada’s unexpected adherence to a hiking bias,” said David Tulk, chief Canada macro strategist at TD Securities.

The currency traded as strong as C$0.9901 to the greenback, or $1.0099, after the central bank statement, from C$0.9970 just before.

By the North American session close, it had weakened back to C$0.9927 versus the U.S. dollar, or $1.0074, flat from Monday’s finish at C$0.9926, or $1.0075.

The Canadian dollar outperformed almost every other G10 currency, aside from the safe-haven U.S. dollar and the yen.

Analysts said the parity level was still holding in as Canadian-dollar support, while resistance was being tested around C$0.99.

The central bank, which has held its key rate at 1.0 percent for two years, also issued a fairly upbeat outlook on growth, surprising some investors.

“The main point here is that the Bank has zero appetite for rate cuts and is still looking for an opportunity to raise rates and I think that will come as a shock to some in the market,” said Doug Porter, deputy chief economist at BMO Capital Markets.

A Reuters poll published last week showed forecasters expect the Bank of Canada to resume raising interest rates late next year.

The currency’s gains were limited by a broader rally in the safe-haven U.S. dollar after lackluster corporate earnings and a downgrade of Spanish regions re-ignited fears about the health of the world economy.

Disappointing Canadian retail sales data earlier in the day also had a dampening effect.

BONDS UNDERPERFORM ON HAWKISH TALK

The Bank of Canada news also hit short-term government bond prices, while longer-term prices were supported by the broader sour mood in markets on Tuesday.

Still, Canadian bond prices underperformed U.S. Treasuries across the curve.

The rate-sensitive two-year bond was off 10 Canadian cents to yield 1.143 percent, while the benchmark 10-year bond rose 17 Canadian cents to yield 1.854 percent.

“Anything north of five years is just more global sentiment than the Bank of Canada, but even still it’s crept in a bit. That’s why you do see a bit of underperformance relative to U.S. Treasuries,” said TD’s Tulk.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the announcement traders resumed placing small bets on the possibility of a rate hike in 2013.

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