CANADA FX DEBT-C$ pares gains after brief Bank of Canada bump

Wed May 29, 2013 11:22am EDT
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* C$ at C$1.0394 to US$, or 96.21 U.S. cents
    * Bank of Canada sticks with rate-hike bias, holds rate
    * Fed tapering debate lurks in background

    By Alastair Sharp
    TORONTO, May 29 (Reuters) - The Canadian dollar was little
changed after briefly firming against its U.S. counterpart on
Wednesday after the Bank of Canada stuck to its view that rates
will at some point need to move higher.
    The loonie, as Canada's currency is colloquially known,
gained in the initial aftermath of the 10:00 a.m. EDT (1400 GMT)
announcement, which was also outgoing Governor Mark Carney's
last rate decision. 
    While the central bank was widely expected to keep the
policy rate and tightening bias unchanged, there had been
speculation in some quarters it could be dropped, a decision
which would likely have weakened the currency.
    But after the initial gain, the currency soon sold off
anyway, breaking through the C$1.04 barrier for the second
straight session. It had not breached that level since June last
    With a rate hike seen as far off into the future, the loonie
seen likely to be more beholden to events in the United States,
Canada's biggest trading partner, where the Federal Reserve is
expected to at some point slow down its asset-purchasing
    "Probably the bigger driver of the Canadian dollar is going
to be developments south of the border. We've got the (Canadian)
dollar weakening significantly in our forecasts, but a good part
of that is likely due to U.S. dollar strength," said Derek
Burleton, deputy chief economist at Toronto-Dominion Bank.
    The Bank of Canada decision balanced the impact of
weaker-than-expected inflation data and more robust growth.
Canada is still expected to lag its southern neighbor this year.
    "Like any currency, what's more important is the relative
performance between the Canadian and U.S. economies. Nothing has
changed the story that Canada's economy is no longer the growth
    At 10:56 a.m. (1456 GMT) the Canadian dollar was
trading at C$1.0394 to the greenback, or 96.21 U.S. cents,
compared with C$1.0395, or 96.20 U.S. cents, at Tuesday's North
American close. It had changed hands at C$1.0367 just before the
rate decision was announced.
    First-quarter gross domestic product data due on Friday will
provide the next major Canadian data point, with expectations of
a decent jump already priced in to the currency, analysts said.
    Meanwhile, expectations for a tapering of the U.S. Fed's
stimulus program have helped yields on Treasuries spike, with
Canadian government debt also rising recently.
    The two-year bond was flat by late morning on
Wednesday to yield 1.073 percent, while the benchmark 10-year
bond gained 5 Canadian cents to yield 2.073 percent.