CANADA FX DEBT-C$ rallies on central bank's tightening bias

Tue Jul 17, 2012 4:40pm EDT
 
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* C$ ends up at C$1.0126 vs US$, or 98.76 US cents
    * Central bank still leans toward rate hike
    * Bonds drift lower across curve

    By Claire Sibonney
    TORONTO, July 17 (Reuters) - The Canadian dollar hit a near
two-week high against its U.S. counterpart on Tuesday after the
Bank of Canada maintained its rate-hiking bias even as other
central banks are easing monetary policy to cope with damaging
economic slowdowns.
    The Bank of Canada left interest rates unchanged on Tuesday
but made clear it was still weighing an eventual move higher,
the same day Federal Reserve Chairman Ben Bernanke said the U.S.
central bank stands ready to take further steps to stimulate the
economy.  
    With growth easing around the globe, many other central
banks have also eased policy recently, including the European
Central Bank and the central banks of Britain and China.
    "There is still some desire on the part of the Bank (of
Canada) to take interest rates higher. They're really trying to
send a message to the market that pricing in cuts is an unwise
suggestion," said David Tulk, chief Canada macro strategist at
TD Securities.
    "At this point it really does suggest that the Bank is
completely on hold, but there is still this bias to take
interest rates higher."
    The Canadian dollar  ended the North American
session at C$1.0126 versus the greenback, or 98.76 U.S. cents,
firmer than Monday's finish at C$1.0147 against the U.S. dollar,
or 98.55 U.S. cents. Earlier, the currency touched C$1.0120, or
98.81 U.S. cents, its strongest level against the U.S. dollar
since July 5.
    Higher interest rates tend to help a country's currency
appreciate because they often attract international capital
flows and vice versa.
    "Obviously it expresses their confidence that in fact the
Canadian economic recovery is relatively firmly rooted, and it
does express the concern (that) behavior they're seeing in the
marketplace is somewhat troubling to them," said Paul Taylor,
investment strategist for BMO Harris Private Banking.
    "I would argue that this is kind of moral suasion or a head
fake on the part of the Bank of Canada to just at least provide
the Canadian consumer with some caution as they go out and buy
high-priced condos in Toronto or Vancouver ... I see it as
simply jaw-boning and nothing more."
    Unlike its struggling U.S. neighbor, Canada's housing market
has boomed in recent years on the back of record-low borrowing
costs.
    Economists and policymakers alike have been concerned for
some time about the risks of an asset bubble in the property
market, though recent signs suggest activity is cooling.
 
    Against a sagging euro, the Canadian dollar traded
near a record peak hit in the previous session, touching an
intraday high of C$1.2390, or 80.71 euro cents.
    Canadian bond prices retreated across the curve on Tuesday,
underperforming U.S. Treasuries at the interest-rate sensitive
short end and outperforming at the long end.
    The two-year government bond fell 3 Canadian
cents to yield 0.973 percent, while the benchmark 10-year bond
 lost dropped 22 Canadian cents to yield at 1.642
percent.