CANADA FX DEBT-C$ stabilizes against greenback as oil rises

Tue May 24, 2016 5:11pm EDT
 
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* Canadian dollar at C$1.3146, or 76.07 U.S. cents
    * Loonie touched its weakest since April 5 at C$1.3188
    * Bond prices slightly lower across the maturity curve

    By Fergal Smith
    TORONTO, May 24 (Reuters) - Higher oil prices helped the
Canadian dollar stabilize against its broadly firmer U.S.
counterpart after the currency weakened to an earlier seven-week
low on Tuesday.
    Oil rose as investors anticipated a weekly drawdown in U.S.
crude inventories. U.S. crude prices were up 2.25 percent
to $49.16 a barrel. 
    Still, the loonie has fallen 5 percent from its 10-month
high of C$1.2461 on May 3, pressured by speculation that the
U.S. Federal Reserve will raise interest rates as early as next
month, as well as a weaker outlook for Canada's economy
following a strong start to 2016.
    Canada's central bank is expected to hold interest rates at
0.50 percent on Wednesday but strike a more dovish tone due
partly to the massive wildfire in Alberta that disrupted oil
production. 
    The economy will probably fall short of the Bank of Canada's
expectations and if oil retreats again, it will become more
"compelling" for the central bank to ease further, said Daniel
Katzive, head of FX strategy for North America at BNP Paribas.
    The Bank of Canada cut twice last year to offset the impact
of an oil price shock that pushed the economy into recession.
    Katzive does not expect the central bank to act on
Wednesday, but said the market is "underpricing chances of
further easing" thereafter.
    Overnight index swaps imply little change in the Bank of
Canada's policy rate this year, having implied a 40 percent
chance of a rate cut just two weeks ago after production cuts in
Alberta's oil sands region. 
    The economy may contract by an annualized rate of 1 percent
or more in the second quarter, according to a research note from
BMO Capital Markets, well below the Bank of Canada's forecast 1
percent expansion.
    The Canadian dollar's official close was at C1.3146
to the greenback, or 76.07 U.S. cents, slightly weaker than
Monday's close of C$1.3143, or 76.09 U.S. cents. It touched its
weakest since April 5 at C$1.3188.
    Canadian government bond prices were slightly lower across
the maturity curve, with the two-year price down 0.5
Canadian cent to yield 0.628 percent and the benchmark 10-year
 falling 14 Canadian cents to yield 1.364 percent.
    The Canada-U.S. two-year bond spread was 1 basis point more
negative at -28.6 basis points, its largest gap since March 28,
as Canadian government bonds outperformed at the front and in
the belly of the curve.

 (Reporting by Fergal Smith; Editing by Lisa Von Ahn and Dan
Grebler)