CANADA FX DEBT-C$ pares sharp gains as Poloz clarifies 18-month remark
(Adds details on Bank of Canada governor's comments) * Canadian dollar at C$1.3327, or 75.04 U.S. cents * Bond prices higher across the yield curve By Fergal Smith TORONTO, Oct 25 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday but sharp gains made after its official close on Monday were mostly pared after the central bank clarified remarks made by Bank of Canada Governor Stephen Poloz. Addressing lawmakers on Monday, Poloz explained that it was not clear cut that the bank should try to speed up closure of the output gap - the economy's spare capacity - by cutting interest rates as it would leave the bank very close to using unconventional tools. The Bank of Canada said on Oct. 19 it expected the output gap to close and the economy to return to full capacity around mid-2018, six months later than previously expected. "The uncertainties, they are multi-dimensional, so we just have to take, we do a fresh judgment every time and we can't plan it out that way, but our best plan right now we think is to wait for the next 18 months or so," he said on Monday. However, the remarks that were reported in some media on Monday were interpreted by the market as conveying that the central bank is on hold for 18 months. The bank later clarified those remarks in an email. "My statement concerning the need to wait 18 months was in reference to the time frame over which the output gap is expected to close," Poloz said in an email. "It was not intended as a reference to the bank's monetary policy." At 11:38 a.m. EDT (1538 GMT), the Canadian dollar was trading at C$1.3327 to the greenback, or 75.04 U.S. cents, stronger than the Bank of Canada's official close of C$1.3386, or 74.70 U.S. cents. The currency's strongest level of the session was C$1.3277, while its weakest was C$1.3371. The Canadian had been on the back foot since the Bank of Canada acknowledged last week that it had considered cutting interest rates at its policy meeting. It touched its weakest in seven months on Monday at C$1.3398. Canadian government bond prices were higher across the yield curve, with the two-year price up 6 Canadian cents to yield 0.535 percent and the benchmark 10-year rising 30 Canadian cents to yield 1.133 percent. The two-year yield fell 3.8 basis points further below its U.S. equivalent to leave a spread of -31.3 basis points, its widest since June 2, as Canadian government bonds outperformed. (Reporting by Fergal Smith; Editing by Daniel Grebler and James Dalgleish)
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