CANADA FX DEBT-C$ flat as Bank of Canada cites headwinds; Fed eyed

Tue Sep 20, 2016 4:45pm EDT
 
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(Adds strategist comment, updates prices to close)
    * Canadian dollar settles at C$1.3209, or 75.71 U.S. cents
    * Bond prices higher across yield curve

    By Alastair Sharp
    TORONTO, Sept 20 (Reuters) - The Canadian dollar ended
little changed against its U.S. counterpart on Tuesday,
recovering from earlier weakness along with U.S. oil as the
governor of the Bank of Canada said interest rates will stay low
for longer given strong economic headwinds.
    Investors were also cautious ahead of Japanese and U.S.
central bank monetary policy decisions due on Wednesday.
    "What we have tomorrow from the Fed is the risk of a hawkish
hold," said Eric Theoret, currency strategist at Scotiabank,
referring to a potential decision to keep rates steady while
pointing to firmer inflation data and recent employment growth. 
    The Canadian dollar settled at C$1.3209 to the
greenback, or 75.71 U.S. cents, barely weaker than Monday's
close of C$1.3207, or 75.72 U.S. cents.
    The currency's strongest level of the session was C$1.3190,
while its weakest level was C$1.3243.
    Theoret said Scotia sees upside risk to its C$1.30
end-of-year forecast, based on technical signals since May, and
that if the currency breaks definitively through C$1.3250
post-Fed, a level tested on Friday and again on Tuesday, selling
pressure could push it on to retracement levels around C$1.33
and C$1.35.
    The commodity-linked currency gained as U.S. oil prices rose
into their afternoon settlement. 
    In a speech suggesting the country's central bank will
remain on the sidelines even as the economy struggles to gain
traction, Bank of Canada Governor Stephen Poloz said
corporations need to adjust their expectations for return on
investment given the low interest rate environment. 
    "They have shifted the narrative. It's just what is the new
narrative? We don't really have that yet," Scotia's Theoret
said. 
    Adding to monetary policy uncertainty, the Bank of Japan
could shake up its policy stance by providing more
bond-purchasing stimulus or pushing its short-term interest
rates deeper into negative territory on Wednesday. 
    Canadian government bond prices were higher on the day, with
the two-year bond up 2 Canadian cents to yield 0.573
percent and the benchmark 10-year climbing 26
Canadian cents to yield 1.165 percent.    
    Canadian inflation and retail sales data are due on Friday.
The annual inflation rate is forecast to have edged up to 1.4
percent in August, while investors will be looking for signs
that the federal government's new child benefit payments boosted
retail sales. 

 (Reporting by Fergal Smith; Editing by Paul Simao and Meredith
Mazzilli)