CANADA FX DEBT-C$ pares sharp gains as Poloz clarifies 18-month remark

Tue Oct 25, 2016 4:52pm EDT
 
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(Adds analyst quotes, updates prices)
    * Canadian dollar ends at C$1.3352, or 74.90 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 pared sharp gains
made after its official close the previous day after the central
bank clarified remarks made by Bank of Canada Governor Stephen
Poloz and as oil fell.
    The central bank governor's remarks as reported in some
media on Monday were interpreted by the market as conveying that
the central bank is on hold for 18 months. The central bank
later clarified those remarks.
    "My statement concerning the need to wait 18 months was in
reference to the timeframe 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."
    Still, the loonie traded much weaker than before Poloz
acknowledged last week that the central bank had considered a
rate cut at its policy meeting.
    "I think the reality is it will depend on the data. If the
numbers are soft enough that warrant an easing, they'll ease,"
said Daragh Maher, head of FX strategy, U.S. at HSBC Securities
(USA) Inc.
    U.S. crude oil futures settled 56 cents lower at
$49.96 a barrel ahead of data likely to show a build in domestic
inventories. 
    Oil is one of Canada's major exports.
    The Canadian dollar ended at C$1.3352 to the
greenback, or 74.90 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.
    On Monday, the loonie touched its weakest in seven months at
C$1.3398.
    Addressing lawmakers on Monday, Poloz explained that it was
not clear cut that the central bank should try to speed up
closure of the output gap - the economy's spare capacity - by
cutting rates as it would leave the bank very close to using
unconventional tools.    
    "They may recognize that there is not much conventional
ammunition left, but then that's what the ammunition is there
for, it's there to be used if required." Maher said.
    Canadian government bond prices were higher across the yield
curve, with the two-year price up 4.5 Canadian cents
to yield 0.543 percent and the benchmark 10-year 
rising 23 Canadian cents to yield 1.14 percent.
    The 2-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 G Crosse)