CANADA FX DEBT-C$ tests 8-month lows as Bank of Canada softens stance

Wed Mar 6, 2013 4:43pm EST
 
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* C$ at C$1.0315 vs US$, or 96.95 U.S. cents
    * Touches C$1.0337 shortly after Bank of Canada decision
    * Rates on hold for "a period of time"-central bank
    * Pace of purchasing activity in Canada slowed in Feb
    * Jobs data on Friday next major event eyed

    By Alastair Sharp
    TORONTO, March 6 (Reuters) - The Canadian dollar weakened
against the U.S. dollar to test but not break recent eight-month
lows on Wednesday after the Bank of Canada held interest rates
steady and softened its stance on the need for tighter monetary
policy.
    The loonie, as Canada's currency is colloquially known,
weakened sharply immediately after the central bank news, before
trimming some of those losses in afternoon trade. 
    "You had that knee jerk reaction ... I think it was
exaggerated a little too much," said David Bradley, a director
of foreign exchange trading at Scotiabank.
    The central bank said it will likely hold its benchmark rate
steady for "a period of time," a tweak from the language used in
January that said a rate hike was "less imminent".
 
    The central bank held its overnight lending target unchanged
- as widely expected - at 1.0 percent, where it has been since
September 2010.
    "They haven't completely disbanded the very mild tightening
bias, but they have found a way to split the hair a little bit
further," said Doug Porter, chief economist at BMO Capital
Markets.
    The Canadian dollar ended the day trading at
C$1.0315 versus the U.S. dollar, or 96.95 U.S. cents.
    It had softened to C$1.0337, stopping short of breaching the
8-month low of C$1.0343 it hit on Friday, just after the central
bank's policy announcement, after closing the North American
session on Tuesday at C$1.0280.
    The loonie would likely now trade between C$1.0290 and
C$1.0340 until the release of employment data due on Friday,
Bradley said. 
    "If we get soft employment data, as we did last month, then
you're going to see another knee jerk reaction and probably
easily take out that C$1.0350 level," he said.
    Canada's economy unexpectedly shed jobs in January while a
Reuters poll shows forecasters expect a modest addition of 8,000
jobs in February. 
    In other data, the pace of purchasing activity in Canada
slowed in February for the second straight month, according to
the Ivey Purchasing Managers Index. 
    The seasonally adjusted index fell to 51.1 in February from
58.9 in January. Analysts polled by Reuters had expected an
adjusted reading of 57.5. 
    The figures took a significant back seat to the Bank of
Canada announcement. But they did reinforce a concern about
slowing growth that has prompted some analysts to turn bearish
on the near-term prospects for the currency. 
    Still, a Reuters poll on Wednesday showed forecasters expect
the Canadian dollar will recover some of its early 2013 losses
and trade at equal value against its U.S. counterpart by the end
of this year. 
    Canada's performance was stronger against some other major
currencies, outperforming the Japanese yen, the euro
 and the British pound, but underperforming
its commodities-linked sister currency, the Australian dollar
.
    Bond prices were mixed. The two-year bond was up
5 Canadian cents to yield 0.931 percent, while the benchmark
10-year bond fell 30 Canadian cents to yield 1.850
percent.