CANADA FX DEBT-C$ up on Bank of Canada decision, weaker greenback

Wed May 29, 2013 4:51pm EDT
 
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* C$ at C$1.0352 to greenback, or 96.60 U.S. cents
    * Bank of Canada sticks with rate-rise bias, holds steady
    * Fed tapering in background, U.S. dollar slips broadly

    By Alastair Sharp
    TORONTO, May 29 (Reuters) - The Canadian dollar gained
against its U.S. counterpart on Wednesday as the greenback's
recent rally lost some steam and 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 central bank
announcement, which was also outgoing Governor Mark Carney's
last rate decision. 
    It then reversed course, breaking through the C$1.04 barrier
for the second straight session, before corporate and
institutional buyers emerged at what is considered the high end
of the established range. Before Tuesday, the loonie had not
breached C$1.04 since June last year. 
    "There was a great opportunity to sell (U.S. dollars) again
at around the C$1.04 level where we started to see some hedging
interest and broad-based (U.S. dollar) selling emerging," said
Darcy Browne, a managing director of foreign exchange sales at
CIBC World Markets.
    The Canadian dollar ended at C$1.0352 to the
greenback, or 96.60 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.
    While the Canadian central bank was widely expected to keep
the policy rate and tightening bias unchanged, there had been
speculation in some quarters that it could be dropped, a
decision that would likely have weakened the currency.
    The greenback retreated against a range of currencies, most
dramatically the safe haven yen and Swiss franc, as U.S. bond
yields came off 13-month highs. 
    "The market is being driven in the short term by higher
short-term yields in the U.S., which have dipped off a little so
the (U.S.) dollar-buying gas pedal has come off a little bit,"
Browne said.
    U.S. yields have surged since Federal Reserve chairman Ben
Bernanke said last Wednesday the U.S. central bank might taper
its program of buying Treasuries and mortgage-backed securities
in the next few Fed policy meetings if data shows the economy is
gaining steam.
    Canadian government debt has reflected the U.S. trend, but
to a lesser degree. 
    The two-year bond ended almost flat to yield
1.075 percent, while the benchmark 10-year bond 
gained 11 Canadian cents to yield 2.066 percent.
    With a rate increase seen as far off into the future, the
loonie is likely to remain beholden to events in the United
States, Canada's biggest trading partner.
    "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," Burleton
said. "Nothing has changed the story that Canada's economy is no
longer the growth outperformer."
    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.