CANADA FX DEBT-C$ weakens, bonds up as Carney to switch central banks

Mon Nov 26, 2012 4:46pm EST
 
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* C$ at C$0.9938 to US$, or $1.0062
    * Bank of Canada chief Carney to take Bank of England job
    * Speculation rate hikes will be pushed out boosts debt
    * Greek deal expected; disappointment could roil markets
    * Stalled U.S. budget discussions also weigh

    By Alastair Sharp
    TORONTO, Nov 26 (Reuters) - The Canadian dollar weakened and
bond prices rose on Monday after the governor of the Bank of
Canada announced he will leave his job next year to head
Britain's central bank.
    The currency dipped sharply, particularly against the
British pound, after Governor Mark Carney said he
would be changing jobs. It only pared some of those knee-jerk
losses as the session progressed.
    "The immediate reaction was sterling buying, Canadian dollar
selling, which speaks to the respect that Carney has with the
markets," said Greg Moore, a foreign exchange strategist at TD
Securities.
    The Canadian dollar ended the day at C$0.9938 to
the U.S. dollar, or $1.0062, weaker than its Friday close of
C$0.9920, or $1.0081.
    TD's Moore said that the Canadian dollar, notwithstanding
major advances in U.S. budget or Greek bailout negotiations,
would likely trade between C$0.9920 and parity through the week.
    Uncertainty over who will replace Carney, and what monetary
policy stance that person will bring, gave a boost to short-term
debt prices as some traders bet his successor could be more
dovish.
    "The immediate reaction in the market was that rate hikes
would get pushed out further that was evidenced by some price
action in the front end of our curve," said Ian Pollick, a fixed
income strategist at RBC Capital Markets. "But at this point
it's a little too early to say."
    The two-year bond gained 4 Canadian cents to
yield 1.105 percent, down from 1.11 percent before the news. The
yield had dipped 2 basis points immediately following the news
before giving back some of the decline. The benchmark 10-year
bond rose 21 Canadian cents to yield 1.763 percent.
    
    SURPRISE, UNCERTAINTY AFTER CARNEY MOVE
    "(The Canadian dollar) has weakened off in light of some
uncertainty as to who will head the Bank of Canada come June
2013," said Camilla Sutton, chief currency strategist at
Scotiabank.
    "We are all well versed in where Governor Carney sat in
terms of how he judged monetary policy and how he judged the
fundamentals in Canada, and so having a new head of the central
bank does introduce some uncertainty."
    She noted that even though Carney had been discussed as a
contender for Bank of England governor, most market players had
discounted his candidacy and were surprised by the news.
    Under Carney, the Bank of Canada has held rates steady for
two years, and - unusual among major economies - was talking up
an eventual raising of rates.  
    Traders were also awaiting the results of Greek debt aid
talks on Monday and continued to fret that pending U.S. tax
hikes and spending cuts could spur a recession unless action is
taken to blunt them.
    Euro zone finance ministers and the International Monetary
Fund were attempting to release emergency aid for Greece for the
third time in as many weeks, but they first had to agree if some
of the official loans to Athens might eventually be forgiven to
cut Greek debt. 
    "The market is probably set up for something fairly decisive
today (on Greece)," said Adam Cole, global head of FX strategy
at RBC Capital Markets in London. "If they fail to agree yet
again it could be quite violently negative."
    U.S. lawmakers have made little progress in the past 10 days
toward a compromise to avoid the "fiscal cliff" of harsh tax
increases and government spending cuts due to start on Jan. 1, 
a senior Democratic senator said on Sunday.