CANADA FX DEBT-C$ hits 5-1/2 year low as dealers see more rate cuts

Thu Jan 22, 2015 5:21pm EST
 
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* Canadian dollar at C$1.2404 or 80.62 U.S. cents
    * Bond prices mixed across the maturity curve

    By Solarina Ho
    TORONTO, Jan 22 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Thursday, closing at a 5-1/2
year low as investors continued to absorb the implications of
the Bank of Canada's stunning interest rate cut a day earlier.
    The market also reacted to the European Central Bank's
launch of a government bond-buying program on Thursday that will
pump hundreds of billions of euros of new money into the
region's sagging economy. 
    The ECB's move was bigger than foreseen and the market was
blindsided by the Bank of Canada's cut of its benchmark
overnight interest rate to 0.75 percent from 1 percent. The bank
called the stimulative move "insurance" against the impact of
low crude prices on the economy of the major oil-producing
nation. 
    "It seems like central bankers worldwide are going with the
shock and awe approach of monetary policy," said TD Securities
macro strategist Mazen Issa, adding that the Bank of Canada's
move was a bit premature.
    "I think it's a bit of a dangerous precedent we're setting
here that the Bank of Canada is now setting monetary policy to
some extent on the price of oil, which is a variable they have
very little control over."
    The Canadian dollar closed at C$1.2404 to the
greenback, or 80.62 U.S. cents, softer than Wednesday's finish
of C$1.2335, or 81.07 U.S. cents. It was its weakest finish
since April 2009.
    "The bias is basically buy U.S. dollar and short everything
else," said Issa, who said C$1.30 to the greenback was well
within reach this year. 
    Forecasters have questioned the effectiveness of a 25 basis
point drop and most primary dealers expect another rate cut
before the end of April, a new Reuters poll showed. 
    The rate move was based on oil prices at $60 a barrel, so
the longer prices stay below that level, the more expectations
of another rate cut will grow, said Greg Moore, senior currency
strategist at RBC Capital Markets.
    The central bank said the weak oil prices were
"unambiguously negative" for Canada's economy. Prices have
plunged since last June as global output continued to climb,
while demand softened. 
    Canadian inflation data for December and retail sales
figures for November are due on Friday, but barring a huge
surprise, their impact has been mostly priced in by the market
following this week's Bank of Canada forecasts.
    Canadian government bond prices were mixed across the
maturity curve, but the two-year bond was up 1
Canadian cent to yield 0.551 percent, and the benchmark 10-year
bond, was 4 Canadian cents higher to yield 1.428
percent.

 (Reporting by Solarina Ho; Editing by Peter Galloway)