CANADA FX DEBT-C$ at 1-1/2-month low as investors mull policy shift

Fri Oct 25, 2013 9:38am EDT
 
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* C$ at C$1.0445 vs US$, or 95.74 U.S. cents
    * Loonie down for third session following central bank shift
    * Canadian bond prices mixed across the curve

    By Leah Schnurr
    TORONTO, Oct 25 (Reuters) - The Canadian dollar languished
at a 1-1/2-month low on Friday after this week's policy shift by
the country's central bank led investors to believe interest
rates will stay where they are for longer than had been
anticipated.
    Highlighting weaker-than-expected growth and inflation, the
Bank of Canada on Wednesday 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 central bank has kept rates at 1 percent since 2010, and
analysts said the removal of the Bank of Canada's rate-rise bias
represented a more neutral tone for policy.
    Analysts had until recently largely expected the Bank would
resume raising rates at the end of next year. A Reuters poll
showed Canada's primary dealers now expect the Bank of Canada to
maintain rates at 1 percent well into 2015. 
    The loonie will likely trade as weak as C$1.07 by the end of
the year, said Mark Chandler, head of Canadian fixed income and
currency strategy at Royal Bank of Canada, though delayed
expectations of when the Federal Reserve will start to reduce
its economic stimulus could soften the decline.
    "We had thought that (level) could happen by the end of this
year. It's possible it might spill into the new year with the
shifting in the taper timetable in the U.S.," said Chandler.
    The Canadian dollar was at C$1.0445 versus the
greenback, or 95.74 U.S. cents, weaker than Thursday's close of
C$1.0425, or 95.92 U.S. cents. The Canadian currency hit a
session low of C$1.0456, the lowest level since early September.
    Investors will get more insight into what the Fed might do
when the central bank meets next week. The Fed surprised markets
in September with its decision to hold the pace of its $85
billion a month in bond purchases steady, rather than trimming
the amount as had been expected.
    The loonie touched a three-month high following the
September Fed announcement but has weakened since. Analysts see
the Canadian dollar benefiting from any delay in the Fed's
withdrawal from quantitative easing as the currency should
attract some risk appetite.
    Canadian government bond prices were mixed across the
maturity curve. The two-year bond was up 4-1/2
Canadian cents to yield 1.076 percent, while the benchmark
10-year bond was off 2 Canadian cents to yield 2.429
percent.