CANADA FX DEBT-C$ firms as rate-cut expectations scaled back

Wed Mar 4, 2015 5:14pm EST
 
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    * Canadian dollar at C$1.2416 or 80.54 U.S. cents
    * Bond prices fall across the maturity curve

    By Solarina Ho
    TORONTO, March 4 (Reuters) - The Canadian dollar
strengthened sharply against its U.S. counterpart on Wednesday
after the Bank of Canada kept interest rates steady and signaled
it was satisfied with how the market and the economy reacted to
its surprise rate cut in January.
    The bank kept its benchmark overnight interest rate at 0.75
percent and said that inflation risks were more balanced
following its unexpected 25 basis point rate cut in January.
 
    Before the bank's statement on Wednesday, the market had
priced in about a 60 percent chance of a rate cut in April.
After the bank's comments about the economy, those expectations
were scaled back to about 20 percent. 
    "The market really seems to be saying now that it may well
be 'one and done'," said Don Mikolich, executive director,
foreign exchange sales at CIBC world markets.
    "I don't know that we're going to have extensive CAD gains
beyond here. We still have the Fed likely to hike, we still have
oil prices ... A lot of the conditions that are out there are
not overly CAD supportive. You've maybe removed one element."
    The Canadian dollar ended the North American
session at C$1.2416 to the greenback, or 80.54 U.S. cents,
stronger than Tuesday's finish of C$1.2490, or 80.06 U.S. cents.
    Canada is a major oil producer and currency strategists are
still calling for a weaker Canadian dollar, linked to low oil
prices, in coming months, according to a Reuters poll released
before the bank's statement. 
    The bank said in January it expects economic growth of 1.5
percent in the first half of 2015 and did not change that
forecast on Wednesday.
    "For them to cut (rates) any further you'd have to see
growth showing downside surprise relative to 1.5 percent
growth," said Craig Wright, chief economist at Royal Bank of
Canada.
    "We think growth will be a bit better than that. If our
growth forecast is correct, then they won't need to go any
further."
    Canadian government bond prices were lower across the
maturity curve. The two-year fell 21 Canadian cents
to yield 0.608 percent and the benchmark 10-year 
fell 82 Canadian cents to yield 1.507 percent.

 (Additional reporting by Alastair Sharp; Editing by Nick
Zieminski and Peter Galloway)