CANADA FX DEBT-C$ down on global fear; little Quebec, BoC impact

Wed Sep 5, 2012 10:55am EDT
 
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* C$ at C$0.9902, vs US$, or $1.010
    * C$ touches session low on ECB, global concerns
    * Bank of Canada holds key rate steady, remains hawkish
    * Separatist PQ wins minority gov't, referendum unlikely
    * Quebec provincial gov't bonds outperform

    By Solarina Ho
    TORONTO, Sept 5 (Reuters) - Canada's dollar weakened against
its U.S. counterpart on Wednesday, as ongoing worries about the
global economy and European monetary policy overshadowed a Bank
of Canada rate decision and an election in French-speaking
Quebec.
    The Bank of Canada left its main policy rate unchanged but
stuck to it tightening bias. And the separatist Parti Quebecois
resumed power in the province of Quebec, winning enough seats to
form a minority government.
    But currency traders were more focused on a key European
Central Bank meeting on Thursday, debating whether a plan to
tackle to euro zone's debt crisis and slowing growth will be as
bold as hoped. 
    The impact of slowing growth in China on commodity prices
also added to concerns. 
    "In the global context of things, right now, the market -
whether it's Canada or anyone else - is really going to be
focused on what happens from the ECB," said Mazen Issa, macro
strategist with TD Securities.
    "Right now, I think the Bank of Canada is probably happy to
take a back seat to global developments and watch what it means
for Canada more generally."
    
    BANK OF CANADA STILL HAWKISH
    The Bank of Canada kept its main policy rate at 1 percent,
as expected, and stuck doggedly to its message that it may have
to raise interest rates despite a global slowdown, predicting
the domestic economy would gain momentum this year and next and
inflation return to target within a year. 
    The Canadian dollar pared some losses immediately after rate
decision, before sliding further to hit a session low of
C$0.9914 against the U.S. dollar, or $1.0087.
    The central bank's hawkish tone stands in contrast to the
U.S. Federal Reserve and other central banks, who have been
contemplating further stimulus moves. But most market players
expect the Bank of Canada to hold steady until at least 2013.
 
    "It was pretty much as expected. No fundamental change in
the very mild tightening bias. Overall, nibbling on the edges,
there were some hints of slightly less hawkishness here," said
Doug Porter, deputy chief economist at BMO Capital Markets.
    "There wasn't much meat on these bones ... And I think
that's exactly what the bank wants. I don't think they were
trying to send any big message here."
    At 10:02, the Canadian dollar stood at C$0.9902, versus the
U.S. dollar, or $1.010, weaker than Tuesday's North American
finish at C$0.9858, or $1.0144. 
    
    QUEBEC BONDS OUTPERFORM
    The Quebec election had limited currency impact. The Parti
Quebecois edged ahead of the ruling Liberals on Tuesday. But the
fact the party won a minority government effectively ruled out
the possibility of another referendum to separate from Canada in
the near term. 
    "Having the PQ minority in place does bode well, have better
implications in terms of the Canadian assets, the Canadian
dollar, some of the bonds," said TD's Issa.
    "Heading into the election, (the minority result) was
already built in, that was the expectation. Now that we've
actually had that result...the Canadian dollar movement, it
probably has less to do with that than broader market
sentiment."
    The gap between Canadian and Quebec government bond yields
narrowed, an indication that investors felt more comfortable
with the province's debt and were demanding less of a risk
premium. 
    The yield on Quebec's benchmark 30-year government bond was
121 basis points above its Canadian counterpart on Wednesday
morning, down from 123 basis points before the election results
were announced. 
    Canadian government bonds were mixed, with the two-year bond
 climbing 3 Canadian cents to yield 1.102 percent. The
benchmark 10-year bond price was down 7 Canadian
cents, to yield 1.745.