CANADA FX DEBT-C$ recovers from 3-week low after Bank of Canada rate decision

Wed Jul 16, 2014 4:22pm EDT
 
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* Canadian dollar at C$1.0746 or 93.06 U.S. cents
    * Bond prices higher across the maturity curve

 (Adds quotes, details, updates prices)
    By Leah Schnurr
    TORONTO, July 16 (Reuters) - The Canadian dollar firmed
modestly against the greenback on Wednesday after the Bank of
Canada stayed neutral on the next move for interest rates in a
statement that was largely what the market had expected.
    The central bank shrugged off a recent surge in inflation as
temporary, warned the economy does not yet have enough steam and
reiterated it could just as easily cut rates as raise them. The
Bank of Canada also held rates at 1 percent. 
    The announcement from the central bank was the key domestic
event of the week and had been highly anticipated by investors
wanting to see how policymakers would address the surprisingly
strong inflation data released last month.
    While the statement initially sent the loonie to a more than
three-week low, the currency managed to reverse course by
midday. 
    Comments from Bank of Canada Governor Stephen Poloz that the
Canadian dollar is a very important variable in export growth
were also taken in stride by the market.
    "There were no surprises for the market, really," said Ken
Wills, currency strategist and broker at CanadianForex in
Toronto. He noted that the bounce in the loonie was likely a    
 "case of sell the rumor, buy the fact."
    The Bank of Canada shifted policy gears last October when it
dropped any mention of tightening on the horizon. Since then,
the central bank has said it holds a neutral stance, though some
in the market have viewed it as tilting toward dovish.
    Analysts said the tone of the statement and Poloz's
subsequent press conference was not as dovish as some in the
market had feared.
    "That may be the only surprise that the market is digesting
right now, that most of his comments seemed much more neutral,
where previously it was a neutral stance, but dovish comments,"
said Wills.
    The Canadian dollar ended the North American
session at C$1.0746 to the greenback, or 93.06 U.S. cents,
slightly stronger than Tuesday's close of C$1.0758, or 92.95
U.S. cents.
    The loonie saw little reaction to data earlier on Wednesday
that showed the value of Canadian factory sales jumped by 1.6
percent in May, more than economists had expected.
 
    Attention will now start to turn to Friday's inflation
report. Annualized inflation is forecast to hold at 2.3 percent
in June. 
    "I think the market is really going to focus on Friday's CPI
numbers to get a better sense of if we can really trust what the
Bank of Canada is saying in terms inflation - are these
inflation numbers really transitory?" said Scott Smith, senior
market analyst at Cambridge Mercantile Group in Calgary.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1.8 Canadian
cents to yield 1.090 percent and the benchmark 10-year
 up 14 Canadian cents to yield 2.200 percent.

 (Editing by Diane Craft)