CANADA FX DEBT-C$ extends rally as further BoC rate cut expectations dim

Tue Apr 28, 2015 4:52pm EDT
 
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(Updates with fresh details, comment from CIBC strategist,
closing figures)
    * Canadian dollar at C$1.2030, or 83.13 U.S. cents
    * Bond prices mixed across the maturity curve

    By Solarina Ho
    TORONTO, April 28 (Reuters) - The Canadian dollar rallied
against a broadly slumping greenback on Tuesday, hitting its
strongest level since before the Bank of Canada shocked markets
in January with an unexpected rate cut, with talk of another cut
losing steam.
    The U.S. dollar hit an eight-week low following a weak U.S.
consumer confidence report and as the Federal Reserve meets to
set its latest monetary policy. Investors are hoping the central
bank will provide clues on when it will raise interest rates.
 
    Domestically, Bank of Canada Governor Stephen Poloz told the
House of Commons finance committee that the negative effects of
the sharp fall in oil prices were hitting Canada more swiftly
than expected, but the shock did not appear to be bigger than
anticipated.  
    "The markets are really stepping back from expectations of
an additional Bank of Canada rate cuts going forward," said
Bipan Rai, director of foreign exchange strategy at CIBC World
Markets.
    "Clearly, the comment about January being enough for now for
the Canadian recovery really did give some lift to the Canadian
dollar. Whether that was intended or not is a different story."
    The Canadian dollar finished the session at
C$1.2030 to the greenback, or 83.13 U.S. cents, stronger than
the Bank of Canada's official close on Monday of C$1.2101, or
82.64 U.S. cents. 
    Earlier in the session, the loonie touched C$1.2015, or
83.23 U.S. cents, its strongest level since before the January
cut.
    Rai said there was scope for the loonie to strengthen
further and trade below C$1.20 in the coming months.
    In the United States, expectations for the Fed to resume
raising interest rates have been pushed to the second half of
2015 after a run of lackluster first-quarter economic data
indicated a softening economy.
    Assuming Wednesday's Fed statement brings no major change in
interest rate expectations, "we would be looking for the (U.S.)
dollar-positive trend to reassert itself fairly quickly," said
Adam Cole, global head of FX strategy at Royal Bank of Canada.
    Looking ahead, U.S. first-quarter GDP data is due at 8:30
a.m. EDT (1230 GMT) on Wednesday, followed by the Fed statement
at 2:00 p.m. (1800 GMT). Canadian February GDP data is due on
Thursday.  
    Canadian government bond prices were mixed across the
maturity curve, with longer-term debt declining. The two-year
 price fell 5.5 Canadian cents to yield 0.676 percent,
and the benchmark 10-year sank 89 Canadian cents to
yield 1.556 percent.
    The Canada-U.S. two-year bond spread was 11.3 basis points,
while the 10-year spread was -44.4 basis points.

 (Additional reporting by Alastair Sharp; Editing by Peter
Galloway, Lisa Von Ahn and Jonathan Oatis)