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