CANADA FX DEBT-C$ unwinds gains as oil prices stay fragile, rate cut bets trimmed

Tue Jan 19, 2016 4:39pm EST
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(Adds analyst quotes, details on household debt, federal budget
timing, updates prices)
    * Canadian dollar at C$1.4559 or 68.69 U.S. cents
    * Bond prices mixed across the maturity curve

    By Fergal Smith
    TORONTO, Jan 19 (Reuters) - The Canadian dollar unwound
earlier gains against its U.S. counterpart on Tuesday as crude
oil prices remained fragile, while relative stability in
financial markets saw traders trim bets that the Bank of Canada
will cut rates on Wednesday.
    Expectation that China might increase stimulus helped
financial markets achieve relative stability following turmoil
at the start of 2016, lending support to risk-sensitive
commodity currencies such as the Canadian dollar. 
    It may have left the market second guessing whether the Bank
of Canada will "pull the rate trigger" on Wednesday, according
to Sal Guatieri, senior economist at BMO Capital Markets.
    The implied probability of a Bank of Canada interest rate
cut on Wednesday dipped to 51 percent from 64 percent on Monday.
A rate cut has been fully discounted by May. 
    Brent crude rebounded from 12-year lows after data
showed record demand in China, but a warning by the world's
energy watchdog that the market could "drown in oversupply"
limited the global benchmark's gains and sent U.S. crude 
down to its lowest since 2003.  
    "Until oil prices bottom out, the Canadian dollar will
remain on the defensive," Guatieri said.
    The Canadian dollar ended at C$1.4559 to the
greenback, or 68.69 U.S. cents, slightly weaker than Monday's
close of C$1.4557, or 68.70 U.S. cents.
    The currency's strongest level of the session was C$1.4433,
while its weakest was C$1.4576. On Monday, it hit its weakest
since April 2003 at C$1.4650.
    Canada's record-high household debt levels will only get
worse this year, the country's parliamentary budget watchdog
    Canada's Liberal government could push back its first
federal budget to April to give policymakers a better idea of
the impact that low commodity prices are having on the economy,
a senior Liberal official said. 
    Canadian government bond prices were mixed across the
maturity curve, with the two-year price up 2.5
Canadian cents to yield 0.293 percent and the benchmark 10-year
 falling 19 Canadian cents to yield 1.180 percent.
The 10-year yield hit a record low on Friday at 1.143 percent.
    The Canada-U.S. two-year bond spread was 3.4 basis points
more negative at -57.7 basis points as Canada's two-year bond
outperformed, trading near its widest gap since March 2007.
    Canadian investors bought a record C$16.46 billion worth of
foreign securities in November, mostly in U.S. Treasury bonds
and stocks, Statistics Canada said. 

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli and
James Dalgleish)