CANADA FX DEBT-C$ weakest in 5-1/2 years after shock Bank of Canada rate cut

Wed Jan 21, 2015 11:18am EST
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

(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)