CANADA FX DEBT-C$ strengthens as oil rallies; investors look to Fed
* Canadian dollar at C$1.2621, or 79.23 U.S. cents * Bond prices mixed across the maturity curve (Updates prices) By Fergal Smith and Leah Schnurr TORONTO/OTTAWA, April 26 (Reuters) - The Canadian dollar strengthened against the U.S. greenback on Tuesday as oil prices rose, but the loonie stuck to a tight range as investors looked ahead to a rate decision from the Federal Reserve. Weaker-than-expected U.S. data also weighed on the U.S. currency, to the benefit of the Canadian dollar. Investors were betting that the Fed will strike a dovish tone in its policy statement to be released on Wednesday, but the uncertainty around the announcement kept moves in the Canadian dollar muted. "It's tough to figure out what exactly their reaction function is right now. They were more dovish than we thought at the prior meeting," said Benjamin Reitzes, senior economist at BMO Capital Markets. The Canadian dollar saw little reaction to comments from Bank of Canada Governor Stephen Poloz that it would take another significant economic shock for the central bank to consider cutting rates again. Reitzes said that had been built in to market expectations after the bank earlier this month upgraded its economic forecasts and brought forward when it expects the output gap to close. "That really wouldn't be consistent with a continued easing bias," said Reitzes. The implied probability of a Bank of Canada rate hike this year had increased to 28 percent from near zero before stronger-than-expected retail sales data on Friday, overnight index swaps (OIS) showed. At the start of March, the OIS market had implied a more than 50 percent chance of a cut. The Canadian dollar closed at C$1.2621 to the greenback, or 79.23 U.S. cents, stronger than Monday's close of C$1.2686, or 78.83 U.S. cents. The loonie has rallied 16 percent since falling to a 12-year low in January. Oil prices rose, boosted by a weaker dollar and by expectations that demand could grow quickly enough to match supply this year. U.S. crude futures settled up $1.40, or 3.3 percent, at $44.04. Canadian government bond prices were mixed across the maturity curve, with the two-year price up 0.5 Canadian cent to yield 0.697 percent and the benchmark 10-year falling 6 Canadian cents to yield 1.552 percent. The 10-year yield touched its highest since Dec. 7 at 1.577 percent. (Editing by Chris Reese and Alan Crosby)
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