CANADA FX DEBT-C$ trims losses but stays near 21-month low

Mon Jun 24, 2013 4:51pm EDT
 
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* C$ at C$1.0486 vs US$, or 95.37 U.S. cents
    * Fed comments slow US$'s rise
    * C$ hits weakest level versus US$ since Oct. 5, 2011
    * 10-year Canadian bond yields highest since August 2011

    By Alastair Sharp
    TORONTO, June 24 (Reuters) - After hitting its weakest level
against the greenback in 21 months on Monday, the Canadian
dollar pared some losses in afternoon trade after U.S. Federal
Reserve officials downplayed market fears of an imminent end to
Fed stimulus measures. 
    Two Fed officials, Narayana Kocherlakota and Richard Fisher,
said the central bank's policy still will be accommodative even
if it scales back its monthly bond buying. 
    "They haven't put a definite timeline as to when the Fed's
going to begin tapering, like it could be years out," said David
Bradley, director of foreign exchange trading at Scotiabank.   
    The comments appeared to assuage skittish investors who have
fled U.S. bonds and the stock market and bid up the value of the
U.S. currency since Fed Chairman Ben Bernanke said last week the
bond-buying program could end by mid-2014.
    The Canadian dollar, which underperformed most
other major currencies on Monday, ended the session at C$1.0486
versus the U.S. dollar, or 95.37 U.S. cents. 
    The currency at one point hit C$1.0556, its weakest level
since Oct. 5, 2011, after finishing on Friday at C$1.0456, or
95.64 U.S. cents.
    Scotiabank's Bradley said the longer-term trend remained
U.S. dollar strength and relative Canadian dollar weakness, and
that C$1.10 was a plausible target if U.S. 10-year yields breach
3 percent.
    "I don't think there's going to be a lot of resistance
between current levels and C$1.0650 should all the other trends
remain intact," he said.
    10-year Treasuries are yielding more than 2.5 percent,
having spiked from around 1.6 percent in early May. 
    Canadian government debt prices mirrored the U.S., with the
two-year bond shedding 2.5 Canadian cents to yield
1.251 percent. The benchmark 10-year bond lost 36
Canadian cents to yield 2.489 percent, just off its highest
yield since early August 2011.
    "We're driven by the U.S. dollar right now, and as U.S.
yields continue to march higher you're going to see continued
U.S. dollar strength. That's probably going to be across the
board," said Benjamin Reitzes, senior economist and foreign
exchange strategist at BMO Capital Markets.
    "It's probably going to be a tough go for Canada for a while
yet. This upward cycle in yields probably, at least for the near
term, isn't done yet."
    Reitzes said BMO was expecting the Canadian dollar to weaken
through to early next year on U.S. dollar strength and a more
robust U.S. economic performance.
    There is little domestic news expected to drive the Canadian
currency until Friday's release of economic growth data for
April. 
    "We're a tad below consensus, looking for an unchanged
number. And last week's soft CPI (consumer price index) number
(is) just another reason for nothing new to come out of Bank of
Canada and no reason for them to tighten policy, to provide any
support for the dollar," Reitzes said.
    Data on Friday showed that a jump in natural gas prices
raised Canada's annual rate of inflation to 0.7 percent in May
from a 3-1/2-year low of 0.4 percent, but the figure remained
well below the central bank's target, confirming there is little
pressure to raise interest rates soon.