CANADA FX DEBT-C$ has biggest one-day jump of 2012 on hawkish BoC

Tue Apr 17, 2012 4:57pm EDT
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* C$ ends at C$0.9902 vs US$, or $1.0099
    * Touches highest level since Mar 19 at C$0.9865
    * BoC holds rate at 1 pct, raises outlook
    * Reuters poll sees rate hike in Q1 2013
    * Bond prices drop, underperform Treasuries

    By Jon Cook	
    TORONTO, April 17 (Reuters) - Canada's dollar logged its
biggest one-day gain this year against the U.S. currency on
Tuesday after the Bank of Canada surprised traders by suggesting
that it was closer to raising interest rates as economic
conditions improve at home and abroad.	
    The Canadian dollar was a leading gainer among major
currencies, jumping nearly 1 percent after the central bank kept
rates unchanged, as expected, but signaled that it was starting
to think more seriously about tightening monetary policy.
    "The prospect of higher interest rates has caused the
Canadian dollar to strengthen," said Mark Chandler, head of
Canadian fixed income and currency strategy at Royal Bank of
    Higher interest rates or expectations of higher rates tend
to help currencies strengthen by attracting international
capital flows.	
    The Canadian currency firmed to a near one-month high at
C$0.9865 versus the U.S. dollar, or $1.0137, after the release
of the bank statement. It was at C$0.9958 immediately before the
    Chandler also pointed to the broader increase in risk
appetite, led by solid demand at a Spanish bill auction and
upbeat German investor sentiment, which boosted commodity prices
and resource-linked currencies.   	
    The Canadian dollar finished at C$0.9902 against
the U.S. dollar, or $1.0099, up nearly a cent from Monday's
North American close at C$0.9997 versus the greenback, or
$1.0003. It was the largest single-day jump since November.	
    The Bank of Canada has frozen rates at 1 percent since
September 2010 after it became the first in the G7 to raise
borrowing costs from lows hit during the financial crisis. 	
    Analysts said the bank's tone in Tuesday's statement was
more hawkish than expected and seemed to signal rate hikes
sooner than previously predicted.	
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the rate
statement traders priced in higher odds of a rate hike later
this year. 	
    "The market is certainly playing (a rate increase) towards
the end of this year," said Mazen Issa, macro strategist at TD
Securities. "From where we were six months ago, this is a
drastic improvement."	
    A Reuters survey of the country's primary dealers, conducted
immediately following the Bank of Canada announcement, showed
the median forecast for the timing of the next rate increase
being pushed up to the first quarter of 2013. 	
    Issa said that after Tuesday's big jump, the Canadian dollar
was not likely to strengthen much further and would remain
around C$0.99 against the U.S. currency, or $1.01, close to the
high end of where it has traded since January.	
    Canadian government bond prices fell after the bank's more
positive economic outlook.	
    The yield on the two-year bond, which is
especially sensitive to Bank of Canada interest rate moves, rose
to 1.333 percent from 1.26 percent just before the release. 	
    The benchmark 10-year bond fell 49 Canadian
cents to yield 2.070 percent. 	
    Canadian government bond prices underperformed U.S.
Treasuries after the news, especially at the short end of the
yield curve. 	
    With the rate announcement done, the market will focus on
the Bank of Canada's Monetary Policy Report on Wednesday, which
is followed by a press conference by Governor Mark Carney.	
    "The way it stands right now the market has a 50-50 chance
that (Carney) would move as soon as September. He may not be
comfortable with the market interpreting a move anytime sooner
than that," said Chandler.