CANADA FX DEBT-C$ rallies to strongest close since late April

Fri Aug 31, 2012 4:36pm EDT
 
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* C$ at 0.9857 vs US$, or $1.0145
    * Bernanke says Fed to act as needed, mindful of risks
    * Canada GDP in second quarter beats forecasts
    * Bond prices mixed

    By Solarina Ho
    TORONTO, Aug 31 (Reuters) - The Canadian dollar on Friday
rallied to its strongest close against the greenback since late
April after data showed Canada's economy grew at a quicker pace
than expected in the second quarter and after Federal Reserve
Chairman Ben Bernanke said the U.S. central bank would take
stimulus action as needed.
    Bernanke said the U.S. economy faces "daunting" challenges
and that progress in reducing unemployment has been too slow,
but he stopped short of providing a clear signal of further
monetary policy easing by the Fed. 
    His comments initially drove stocks and the Canadian
currency lower but the tide turned as the market digested the
speech. 
    "The initial reaction in most financial markets was a little
bit of a disappointment, initially. The risk obviously was that
he ended up having no imminent plans on the table," said Mark
Chandler, head of Canadian fixed income and currency strategy at
Royal Bank of Canada.
    "Second read of it had risk appetite come back again. The
Canadian dollar pretty much followed that." 
    The Canadian dollar closed at C$0.9857 versus the U.S.
currency, or $1.0145, stronger than Thursday's North American
session close of C$0.9923, or $1.0078. It was the strongest
close for the currency since April 27.
    It rose as high as C$0.9852, or $1.0150, after Bernanke's
speech.
    The Canadian dollar was also firmer against most other major
currencies, including the euro and Australian dollar.
    Also helping its rise was data that showed Canada's GDP grew
at an annualized 1.8 percent in the second quarter, exceeding
analysts' estimates. 
    "A little bit stronger than what the market had looked for.
The underlying details still show pretty much the theme we
expected with respect to some fading domestic demand," said
David Tulk, chief Canada macro strategist, TD Securities.
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that traders
increased bets on a rate hike in 2013 after the data. 
    The Canadian dollar got an early-session boost from comments
by European Central Bank member Benoit Coeure that spurred
market expectations that the ECB will intervene to help tackle
the region's three-year-old debt crisis.
    Coeure said ECB bond purchases in the sovereign debt market
must be subject to strict conditionality. The comment fueled
hopes the central bank will buy Spanish and Italian government
bonds to reduce the high borrowing costs the two governments are
facing. 
    The Canadian currency will seek direction from a number of
events heading into September. Next week will see the Quebec
provincial election, a Bank of Canada rate announcement and U.S.
and Canadian employment figures for August.
    "(Bernanke) suggested (the situation) was very
data-dependent going forward, so next Friday's payrolls are
obviously the next chief hurdle," Chandler said.
    He also pointed to Fed meetings the following week as well
as a German court ruling on the constitutionality of bond buying
in Europe. "So we're set to have more meaningful moves in
financial markets over the next two weeks," Chandler said.
    Canadian bond prices were mostly lower on Friday, with the
two-year bond down 5 Canadian cents to yield 1.152
percent and the benchmark 10-year bond down 5
Canadian cents to yield 1.776 percent.