CANADA FX DEBT-C$ weakest in 5-1/2 years after shock Bank of Canada rate cut
(Adds Bank of Canada details, comments, updates currency prices, bond moves) * Canadian dollar touches C$1.2420 vs US$, or C$80.52 U.S. cents * Bank of Canada cuts overnight rate to 0.75 percent, slashes outlook * Bond prices surge across the maturity curve * Bond yields plunge to record lows across the board By Solarina Ho TORONTO, Jan 21 (Reuters) - The Canadian dollar on Wednesday plunged more than 2 percent to its weakest since April 2009 after the Bank of Canada shocked financial markets with an interest rate cut, while bond yields fell to record lows across the board. The central bank cut its overnight rate to 0.75 percent from 1 percent to counter the impact of cheap crude prices on economic growth and inflation, ending the longest period of unchanged interest rates in Canada since 1950. The move was also an effort to prevent financial instability that could result from a vulnerable housing market, the bank said. "(Bank of Canada governor) Mr Poloz has been eschewing forward guidance and he's now demonstrated exactly what that means ... consequently we've seen the Canadian dollar getting hit relatively hard," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London. "Central banks are keeping me busy these days, never has that been truer than in the past week." The Canadian dollar retreated to as much as C$1.2420 against the U.S. dollar, or 80.52 U.S. cents, its weakest since April 21, 2009, before paring some of its losses. It was still trading at C$1.2314, or 81.21 U.S. cents around late morning, about 2-1/2 Canadian cents weaker than just before the announcement and weaker than Tuesday's close of C$1.2107, or 82.60 U.S. cents. The market had begun pricing in a higher risk of a rate cut but most forecasters believed the next move, while pushed further back, would still eventually be a hike. "There were adjectives that I won't use, but yeah, there was a collective gasp," said Jack Spitz, managing director of foreign exchange at National Bank Financial. "We didn't see this one coming." The Bank of Canada also dramatically slashed its inflation and growth forecasts for the coming year, saying that lower oil prices "will be unambiguously negative for the Canadian economy in 2015 and subsequent years." Canada is the biggest foreign supplier of crude to the U.S. market. The currency's moves have been closely tied to the price of oil , which has plunged more than 50 percent since June on a global supply glut and waning demand. Canadian government bond prices surged across the maturity curve, with yields hitting record lows. The two-year bond jumped 54.5 Canadian cents to yield 0.579 percent and the benchmark 10-year soared 94 Canadian cents to yield 1.385 percent. (Additional reporting by Alastair Sharp; Editing by Jeffrey Benkoe and James Dalgleish)
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