CANADA FX DEBT-C$ hits 2-1/2 month low as rates seen on hold

Thu Nov 21, 2013 4:46pm EST
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* C$ at C$1.0521 vs US$, or 95.05 U.S. cents
    * Poloz comments bolster view of low rates for longer
    * Bond prices higher across the curve

    By Leah Schnurr
    TORONTO, Nov 21 (Reuters) - The Canadian dollar weakened to
its lowest level in 2-1/2 months against the greenback on
Thursday as comments from the head of the Bank of Canada
reinforced market expectations that interest rates will remain
low for some time.
    In an appearance before a Senate committee late on
Wednesday, Bank of Canada Governor Stephen Poloz said the
central bank's economic analysis differed from that of the
Organization of Economic Cooperation and Development (OECD),
which recommended that it start raising interest rates as soon
as 2014. 
    Last month, the central bank surprised markets with a major
shift in policy, dropping any mention of an eventual rise in
rates after 18 months of explicitly stating that rate hikes were
on the horizon. 
    "Basically, Poloz has come out and said 'lower rates for
longer'," said Rahim Madhavji, president of Knightsbridge
in Toronto. Still, the impact of Poloz's comments may be a bit
overstated as markets had already expected that to be the case, 
Madhavji said.
    A recent Reuters poll of primary dealers showed the Bank of
Canada is expected to keep its key rate at 1 percent well into
    The Canadian dollar ended the North American
session C$1.0521 versus the U.S. dollar, or 95.05 U.S. cents,
weaker than Wednesday's North American close of C$1.0447, or
95.72 U.S. cents. The loonie hit a low of C$1.0527, its lowest
since early September.
    Investors were also trying to gauge the timetable for
monetary policy changes south of the border after U.S. Federal
Reserve minutes released Wednesday showed officials felt that
the Fed's stimulus program could be scaled back in the next few
months if the economy improves enough. 
    Markets are trying to position for the possibility that the
Fed will begin to taper its bond purchases at its next meeting
in December, or hold off until 2014. 
    The loonie came under pressure after data showed the number
of Americans filing for new unemployment benefit claims fell
sharply last week, suggesting there was some strengthening of
conditions in the U.S. labor market, which is closely watched by
the Fed. 
    The Canadian dollar is seen benefiting from a Fed decision
delay slowing its quantitative easing program as that would
likely increase investors' risk appetite and weigh on the U.S.
    As investors assess the likely path of monetary policy at
home, Canadian consumer price data due on Friday morning will
come under scrutiny.
    The market expects Canada's annual inflation rate to pull
back to 0.9 percent in October from 1.1 percent the month
before. Core inflation, which strips out volatile items and is
closely watched by the Bank of Canada, is forecast to slip to
1.2 percent from 1.3 percent on an annual basis. 
    "Inflation is going to be the theme that's going to drive
interest rate policy in Canada," Madhavji said. "The commentary
around there (being) lots of slack in the economy, in essence,
is saying look at inflation as the first indicator of how we're
going to establish interest rate policy in Canada."
    Separate data is expected to show retail sales ticked up in
    Canadian bond prices were higher across the maturity curve,
with the two-year bond up 8-1/2 Canadian cents to
yield 1.108 percent, while the benchmark 10-year bond
 was up 10 Canadian cents to yield 2.623 percent.