CANADA FX DEBT-C$ sinks to 5-1/2 year lows as central bank seen dovish
* Canadian dollar at C$1.2027 or 83.15 U.S. cents * Bond prices mostly lower across the maturity curve By Solarina Ho TORONTO, Jan 16 (Reuters) - The Canadian dollar retreated to a 5-1/2 year low against its U.S. counterpart on Friday on broad U.S. dollar strength and expectations of a dovish Bank of Canada report next week. Some market participants predicted the Bank of Canada's Monetary Policy Report will show a pullback in the bank's growth and inflation forecasts, and that helped weaken the loonie through the key level of C$1.20 to the U.S. dollar. "We are running into decent interest now that we've been above C$1.20, so that has put a cap for now," said Blake Jespersen, managing director, foreign exchange sales, at BMO Capital Markets. "But now that we have the market pricing in a higher likelihood of a (rate) cut by the Bank of Canada this year, that is going to weigh on the Canadian dollar over the short term." Foreign exchange markets were still reeling from the Swiss central bank's stunning move on Thursday to remove its ceiling on the franc's value against the euro, and investors took the move as a sign the European Central Bank will opt for quantitative easing at its policy meeting next week. The Canadian dollar was broadly weaker against most of its currency counterparts except the Swiss franc and the euro. Against the U.S. dollar, it was trading at C$1.2027, or 83.15 U.S. cents, weaker than Thursday's close of C$1.1964, or 83.58 U.S. cents. At one point the currency softened to C$1.2047, or 83 U.S. cents, its weakest level since the end of April 2009. The commodities-linked loonie brushed off a move higher by crude oil, which rose on comments by the International Energy Agency that there were already signs the market selloff would end. Canada is a major oil exporter. "Oil has been the driver over the past few months but ... that correlation at least for the very, very short term has broken apart," Jespersen said. "Now interest rates and overall flight to quality have trumped that." Canadian government bond prices were mostly lower across the maturity curve, with the two-year falling 5.5 Canadian cents to yield 0.839 percent and the benchmark 10-year declining 22 Canadian cents to yield 1.492 percent. (Editing by Peter Galloway)
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