CANADA FX DEBT-C$ rallies on reduced rate cut bets, higher oil prices
(Adds detail on rate outlook, auction, quotes; updates prices) * Canadian dollar at C$1.4279, or 70.03 U.S. cents * Bond prices lower across the maturity curve By Fergal Smith TORONTO, Jan 21 (Reuters) - The Canadian dollar rallied against its U.S. counterpart on Thursday as Bank of Canada rate cut bets were pared, while a rally in crude oil prices and stocks added to support for the currency. The market reappraised the Bank of Canada policy outlook after it decided on Wednesday not to cut interest rates, putting the onus on federal authorities to raise spending. "The reference to fiscal policy puts the Bank of Canada on hold for at least the next several months," said Bipan Rai, director of foreign exchange strategy at CIBC Capital Markets. The implied probability of a March rate cut dwindled to less than 16 percent from 26 percent at Wednesday's close, while the market no longer fully discounted a rate cut by the end of 2016. European Central Bank President Mario Draghi provided a strong signal that more easing could be coming within months , lending support to risk-sensitive assets including commodity currencies. Oil prices rebounded from 12-year lows as rallying financial markets gave some bearish traders reason to take profits on record short positions. The Canadian dollar ended at C$1.4279 to the greenback, or 70.03 U.S. cents, much stronger than Wednesday's close of C$1.4490, or 69.01 U.S. cents. The currency's strongest level of the session was C$1.4228, while its weakest was C$1.4540. The 70 U.S. cents rate is the key level to watch, according to Rai. The currency had fallen below that psychological threshold last week for the first time since May 2003. Canadian government bond prices were lower across the maturity curve, with the two-year price down 13.5 Canadian cents to yield 0.455 percent and the benchmark 10-year falling 95 Canadian cents to yield 1.264 percent. The Canada-U.S. two-year bond spread was 4.8 basis points less negative at -38.5 basis points, while the 10-year spread was 5.1 basis points less negative at -77.2 basis points as Canadian government bonds underperformed. The Bank of Canada conducted a 10-year auction on behalf of the Government of Canada, with C$2.5 billion issued of a bond maturing in June 2026, carrying a 1.5 percent coupon, at an average yield of 1.380 percent. December inflation and November retail sales data are awaited on Friday. (Reporting by Fergal Smith; Editing by Meredith Mazzilli and James Dalgleish)
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