CANADA FX DEBT-C$ strengthens on oil, less dovish than expected Bank of Canada

Wed May 25, 2016 11:34am EDT
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(Adds analyst quote, details on Bank of Canada rate decision,
updates prices)
    * Canadian dollar at C$1.3085, or 76.42 U.S. cents
    * Bond prices mixed across the maturity curve

    By Fergal Smith
    TORONTO, May 25 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Wednesday as oil rallied and
after the Bank of Canada's press release was less dovish than
some investors had expected.
    The Bank of Canada kept interest rates on hold at 0.50
percent on Wednesday, saying the economy would shrink in the
second quarter as a result of damage from recent wildfires in
Alberta before rebounding later in the year. 
    "It's a fairly neutral looking statement," said Shaun
Osborne, chief currency strategist at Scotiabank, who added that
the loonie benefited from a relief rally after the central bank
was not as dovish as some had been looking for.
    Overnight index swaps implied just a 4 percent chance of a
rate cut this year, slightly lower than before the Bank of
Canada interest rate decision and well below the 40 percent
probability implied two weeks ago after a wildfire cut
production in Alberta's oil sands region.     
    Oil rose as crude inventories fell more sharply than
expected, although some gains were pared as prices approached
$50 per barrel. U.S. crude prices were up 0.45 percent to
$48.84 a barrel. 
    Adding to support for risk-sensitive commodity-linked
currencies such as the Canadian dollar, stocks climbed as risk
eased that Britain and Greece would leave the European Union,
while German business morale improved more than expected in May.
    At 11:22 a.m. EDT (1522 GMT), the Canadian dollar 
was trading at C$1.3085 to the greenback, or 76.42 U.S. cents,
stronger than Tuesday's official close of C$1.3146, or 76.07
U.S. cents.
    The currency's weakest level was C$1.3133, while it touched
its strongest since May 19 at C$1.3052.
    Still, the loonie has fallen near 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.
    Canadian government bond prices were mixed across the
maturity curve, with the two-year price flat to yield
0.629 percent and the benchmark 10-year rising 8
Canadian cents to yield 1.356 percent.
    The Canada-U.S. two-year bond spread was 0.7 of a basis
point less negative at -28.9 basis points as Canadian government
bonds underperformed slightly at the front of the curve.

 (Reporting by Fergal Smith; Editing by Bernadette Baum and
Chris Reese)