CANADA FX DEBT-C$ firms from 12-year low after Bank of Canada holds rate steady
* Canadian dollar at C$1.4490 or 69.01 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 rallied against its U.S. counterpart on Wednesday after the Bank of Canada surprised many traders by leaving rates on hold, rebounding from a fresh 12-year low despite a worsening rout in crude oil prices. The central bank decided not to cut interest rates but admitted it was not an easy call, as concern about a rapid decline in the currency clashed with an economic slump. "(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 Bank of Canada has yet to incorporate expected fiscal stimulus into its projections. It suggests to some dealers that the central bank will wait until the federal budget is tabled before any move on rates, keeping the central bank sidelined in March. However, the market has implied a greater-than 50 percent probability of an April rate cut and it has fully discounted a rate cut by year-end. "Our view is that they'll remain data-dependent," said Briggs. Canadian manufacturing sales and wholesale trade rebounded more strongly than expected in November. That data, however, was overshadowed by financial market volatility and the rate decision. The Canadian dollar ended at C$1.4490 to the greenback, or 69.01 U.S. cents, firmer than Tuesday's close of C$1.4559, or 68.69 U.S. cents. The currency's strongest level of the session was C$1.4474, 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. Canadian government bond prices were mixed across a much flatter maturity curve. The two-year price was down 21 Canadian cents to yield 0.392 percent as the rate decision weighed on the front-end. But the benchmark 10-year rose 8 Canadian cents to yield 1.169 percent, supported by the flight to safety. It hit a fresh record low at 1.094 percent. The Canada-U.S. two-year bond spread was 13.8 basis points less negative at -43.7 basis points, while the 10-year spread was 3.2 basis points less negative at -82.6 basis points as Canadian government bonds underperformed. (Editing by Nick Zieminski and Jonathan Oatis)
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