CANADA FX DEBT-C$ falls on U.S. Fed statement; ECB eyed

Wed Aug 1, 2012 4:23pm EDT
 
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* C$ ends at C$1.0052 vs US$, or 99.48 U.S. cents
    * Currency touches session low after Fed disappoints
    * Earlier, C$ touches C$1.0003 or 99.97 U.S. cents
    * Bond prices slip across the curve

    By Jennifer Kwan
    TORONTO, Aug 1 (Reuters) - The Canadian dollar sank against
its U.S. counterpart on Wednesday after the U.S. Federal Reserve
said the economy was weaker but left policy on hold, and
investors shifted their focus on the European Central Bank.
    The U.S. Fed stopped short of offering new monetary stimulus
even as it signaled further bond buys could be in store, sending
riskier assets like stocks and some metals prices like copper
lower. 
    "The results will disappoint some in the equity markets that
had pinned their hopes on new measures today. Bearish for
equities and other risk assets as a result," said Avery
Shenfeld, chief economist at CIBC World Markets.
    The Fed's policy decision comes a day before a key meeting
of the European Central Bank. ECB President Mario Draghi
heightened speculation of further bank purchases of Italian and
Spanish bonds when he said last week that he would do "whatever
it takes to preserve the euro."
    Still, the risk of disappointment is fairly high and the
euro could sell off if the ECB does not deliver. 
    "There's obviously still a great deal of hope remaining for
the ECB to fulfill market expectations. I don't see that
happening," said John Curran, senior vice president at
CanadianForex. "There's no magic bullet."
    The Canadian dollar ended at C$1.0052 against the
greenback, or 99.48 U.S. cents, after falling as low as
C$1.0057. On Tuesday, the currency finished at C$1.0029 against
the greenback, or 99.71 U.S. cents. 
    Investors were largely unmoved on Wednesday by economic data
that showed economies around the world showed signs of slowing.
    In Canada, RBC Purchasing Managers' Index posted its first
decline in six months. 
    South of the border, data showed the U.S. private sector
added 163,000 jobs in July, topping economists' expectations of
120,000 new jobs. The report from payrolls processor ADP came
two days ahead of Friday's more important government monthly,
non-farm payrolls report.
    Also on Wednesday, data pointed to a sluggish global
manufacturing picture. U.S. and euro zone factory activity
struggled again in July while Chinese manufacturing fell to an
eight-month low.
        
    BONDS LOWER
    Economists at Scotiabank revised their outlook for the next
Bank of Canada move on interest rates. They believe the central
bank will be on hold until early 2014 compared with their
earlier forecast of a rate hike in the third quarter of 2012.
    "We think the Canadian economy will remain soft enough such
that it underperforms the speed limit to growth and builds more
spare capacity over time," Derek Holt and Dov Zigler wrote.  
"That should remain broadly disinflationary in support of a
potentially very long pause on policy rates."
    Most Canadian primary dealers expect the Bank of Canada to
hold interest rates steady until mid-2013 or later. 
    Canadian bond prices were flat to lower across the curve
with the two-year bond off by 4 Canadian cents to
yield 1.096 percent, and the benchmark 10-year bond 
was down 33 Canadian cents to yield 1.711 percent.
    Separately, the Bank of Canada's auction of two-year bonds
produced an average yield of 1.147.