CANADA FX DEBT-C$ loses half a cent as U.S. data boosts greenback

Tue May 28, 2013 4:40pm EDT
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* C$ at C$1.0395 to US$, or 96.20 U.S. cents
    * U.S. housing and consumer confidence data helps greenback
    * Bank of Canada's Wednesday rate decision statement eyed
    * Prices of government bonds fall across the curve

    By Alastair Sharp
    TORONTO, May 28 (Reuters) - The Canadian dollar weakened by
more than half a cent against its U.S. counterpart on Tuesday,
as the greenback gained on robust economic data that supported a
view of the Federal Reserve starting to unwind its stimulus
program in coming months.
    The loonie, as Canada's currency is colloquially known, has
fallen sharply in recent weeks as domestic data suggests the
economy will lag behind its larger neighbor, the United States.
    It was not alone on Tuesday, as a string of major currencies
including the euro and yen slipped against the U.S. dollar while
North American stock markets gained.  
    "We have had strong equities but a generally weak
environment for (non-U.S.) currencies today," said Camilla
Sutton, chief currency strategist at Scotiabank.
    Currency traders are also looking ahead to the Bank of
Canada rate decision on Wednesday, as they consider the outside
chance that outgoing Governor Mark Carney moves the central bank
to a neutral stance.
    "We expect either a similar statement, or slightly less
hawkish ... so the surprise would be if it is substantially more
dovish," Sutton said.
    She said the broad move in currencies was largely a reaction
to several pieces of U.S. data that supported the notion that
the Fed's monetary easing could soon be slowed.
    The S&P/Case Shiller index showed that U.S. home prices
accelerated by the most in nearly seven years in March, while 
separate data showing surging consumer confidence pointed to
some resilience for the economic recovery. 
    The Canadian dollar ended the session trading at
C$1.0395 to the greenback, or 96.20 U.S. cents, compared with
C$1.0337, or 96.74 U.S. cents, at Monday's North American close.
    "There definitely seems to be a desire to take some exposure
to Canada off the table at the moment," said Shaun Osborne,
chief currency strategist at TD Securities.
    Earlier in May, the loonie had almost breached equal value
with the greenback, while several months ago it was worth more
than the U.S. dollar as it appeared that the Bank of Canada was
much more likely to hike rates before the U.S. Federal Reserve
would do so.
    A Reuters poll shows economists don't expect any tightening
in Canada until the end of next year as domestic data keeps
showing weakness. 
    Some economists have questioned whether the central bank
might drop a key phrase about plans to raise borrowing costs
eventually. That language makes Canada's central bank the only
one among the Group of Seven with an explicit tightening bias.
    But others have suggested that Carney is unlikely to make a
policy shift with the last rate announcement before he leaves to
head the Bank of England in July.
    "There is a train of thought in the market that on the basis
of the data in Canada there is a justification perhaps for the
bank moving to a neutral stance," Osborne said, adding that a
change in policy is not his base assumption.
    He said the loonie could test C$1.06 within weeks, and that
dropping the tightening bias would likely push the currency
through C$1.04 on Wednesday.
    The price of Canadian government debt fell across the curve,
with the longer end plummeting. The two-year bond 
lost 6 Canadian cents to yield 1.073 percent, while the
benchmark 10-year bond sank 90 Canadian cents to
yield 2.084 percent.
    The rise in Canadian yields was less than that seen south of
the border, where the Fed's eventual pulling back on bond
purchases would have a more direct impact.