CANADA FX DEBT-C$ tumbles to 1-week low on Bank of Canada shift

Wed Oct 23, 2013 12:50pm EDT
 
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* C$ at C$1.0393 vs US$, or 96.22 U.S. cents
    * Change in Bank of Canada language undermines loonie
    * Worries of tighter money in China had set negative tone
    * Canadian bond prices higher, outperform Treasuries


    By Leah Schnurr
    TORONTO, Oct 23 (Reuters) - The Canadian dollar fell nearly
a cent to a one-week low against the U.S. dollar on Wednesday
after a shift in policy gears by the Bank of Canada pushed the
prospect of higher interest rates further down the line.
    Highlighting weaker-than-expected growth and inflation, the
Bank of Canada dropped any mention of eventual rate increases
from its latest policy statement after more than a year of
warning that rates will one day have to rise. 
    The surprise removal of the central bank's so-called
tightening bias yanked the loonie to a session low of C$1.0394.
The bank has held interest rates at 1 percent since 2010.
    "The drop of the tightening bias is going to be read as an
unexpected shift in terms of the policy stance. It implies less
likelihood of rates moving up," said Paul Ferley, assistant
chief economist at Royal Bank Of Canada.
    "A move wasn't viewed as imminent, but that policy statement
pushes out any expectation of any rate hikes further into the
future, and that weighs on the Canadian dollar." 
    The Canadian dollar was at C$1.0393 versus the
greenback, or 96.22 U.S. cents, weaker than Tuesday's close of
C$1.0289, or 97.19 U.S. cents. 
     A Reuters poll published last week showed forecasters
expected the Bank of Canada's next interest rate move would be a
hike in the fourth quarter of 2014. 
    But overnight index swaps, which trade based on expectations
for the central bank's policy rate, showed that after the bank's
latest statement, traders slashed bets that rates will rise late
next year and priced in a small chance of a cut before then.
 
    Canadian government bond prices, already stronger overnight,
climbed further on the news and outperformed U.S. Treasuries. 
    The two-year bond was up 13.5 Canadian cents to
yield 1.100 percent and the benchmark 10-year bond 
gained 50 Canadian cents to yield 2.421 percent.
    The loonie had already taken on a negative tone earlier in
the session on worries over tighter monetary conditions in
China.
    China's primary short-term money rates rose after a policy
adviser to the People's Bank of China said on Tuesday that the
central bank may tighten cash conditions in the financial system
to address inflation risks. 
    Investors are worried tightening could hamper growth in
China, the world's second-largest economy and a major consumer
of commodities.