CANADA FX DEBT-C$ dips on rate cut talk, losses pared after 12-year low

Thu Jan 14, 2016 4:43pm EST
 
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(Adds analyst quotes, updates prices)
    * Canadian dollar at C$1.4362, or 69.63 U.S. cents
    * Currency hit a fresh 12-year low at C$1.4398
    * Bond prices mixed across the maturity curve

    By Fergal Smith
    TORONTO, Jan 14 (Reuters) - The Canadian dollar hit a fresh
12-year low against its U.S. counterpart on Thursday amid
speculation the Bank of Canada will cut its key interest rate
next week, although it pared some losses as crude oil prices
climbed.
    The implied probability of a rate cut next week has
increased to 50 percent from just 22 percent after a speech last
week by Bank of Canada Governor Stephen Poloz, while the market
has fully discounted a rate cut by April. 
    There has been a "big change in view from on hold, now to
cut, in just a span of two weeks," said Jennifer Lee, senior
economist at BMO Capital Markets.
    Even so, a Reuters poll on Thursday showed that while
forecasters think stubbornly low oil prices will weigh on the
Canadian economy in 2016, a recession or further interest rate
cut by the Bank of Canada are not expected this year. 
    After moving to project a rate cut next week, BMO Capital
markets has lowered its forecast for the Canadian dollar to
67.50 U.S. cents by mid-2016, according to Lee.
    "If it is not going to happen next week (a rate cut) we
could see it happening in March, but probably just one move,"
said Lee.
    "It will be very difficult to continue cutting rates in an
environment where the Fed (U.S. Federal Reserve) is actually
raising," added Lee, pointing to the impact on the currency.
    Oil prices rebounded, snapping an eight-day rout, as some
players covered short positions. 
    U.S. crude prices settled at $31.20 a barrel, up 2.36
percent. 
    The Canadian dollar ended at C$1.4362 to the
greenback, or 69.63 U.S. cents, than the Bank of Canada's
official close on Wednesday of C$1.4345, or 69.71 U.S. cents.   
    
    New home prices in Canada rose by 0.2 percent in November
from October, pushed up by strength in the major regions of
Toronto and Vancouver, Statistics Canada said. 
    Canadian government bond prices were mixed across the
maturity curve, with the two-year price down 1.5
Canadian cents to yield 0.316 percent and the benchmark 10-year
 rising 12 Canadian cents to yield 1.23 percent.
    It left the 10-year yield within reach of the August 2015
record trough at 1.189 percent.
    The Canada-U.S. 10-year bond spread was four basis points
more negative at -86.3 basis points as Canadian government bonds
outperformed for longer-dated maturities.

 (Editing by G Crosse)