CANADA FX DEBT-C$ pulls back from 12-year low as rates held steady; oil drags

Wed Jan 20, 2016 1:13pm EST
 
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(Updates prices, adds comments)
    * Canadian dollar at C$1.4594 or 68.52 U.S. cents
    * Currency had hit a fresh 12-year low at C$1.4689
    * Bond prices mixed as Bank of Canada holds steady
    * The 10-year yield hit a fresh record low at 1.094 percent

    By Fergal Smith
    TORONTO, Jan 20 (Reuters) - The Canadian dollar pared losses
on Wednesday after the Bank of Canada left rates on hold,
although the rebound from a fresh 12-year low was constrained by
a worsening rout in crude oil prices and an extended selloff in
global stocks.
    The rapid depreciation in the currency was seen by some as a
reason for the Bank of Canada to leave rates on hold, even as
the central bank marked down its economic projections.
 
    "(A rate cut) would send the wrong signal to the market at
this point and time," said Darcy Briggs, a fixed-income
portfolio manager with the Bissett unit of Franklin Templeton
Investments.
    "The effects of the currency depreciation take time to come
through the system," Briggs added.
    The focus shifted to whether the central bank will cut at
its next interest rate announcement in March, or in April, when
it delivers its next monetary policy report.
    "Our view is that they'll remain data-dependent," said
Briggs. "By March, they will have a pretty good idea what the
government's coming out with in terms of a budget and deficit
spending."
    At 12:50 p.m. EST (1750 GMT), the Canadian dollar 
was trading at C$1.4594 to the greenback, or 68.52 U.S. cents, 
weaker than Tuesday's close of C$1.4559, or 68.69 U.S. cents.
    The currency's strongest level of the session was C$1.4491,
while it hit its weakest since April 2003 at C$1.4689.    
    U.S. oil prices crashed to below $27 for the first time
since 2003, caught in a broad slump across world financial
markets. 
    "The short-term impact of the Bank decision will fade," said
David Watt, chief economist at HSBC Bank Canada, pointing to the
currency's tight relationship with crude oil prices.
    The financial turmoil overshadowed stronger than expected
Canadian manufacturing sales and wholesale trade data for
November.  
    Canadian government bond prices were mixed across a much
flatter maturity curve.
    The two-year price was down 15 Canadian cents to
yield 0.363 percent as the rate decision weighed on the
front-end. But the 10-year rose 50 Canadian cents to
yield 1.124 percent as the flight to safety supported
longer-term bonds. The 10-year yield hit a fresh record low at
1.094 percent.
    The Canada-U.S. two-year bond spread was 13.3 basis points
less negative at -44.2 basis points, while the 10-year spread
was 3.5 basis points less negative at -82.3 basis points as
Canadian government bonds underperformed.

 (Editing by Nick Zieminski and Jonathan Oatis)