CANADA FX DEBT-C$ falls from 3-yr high on BOC rate outlook

Tue Mar 1, 2011 10:17am EST
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 * Bank of Canada gives no hint of next rate hike
 * C$ eases to session low
 * Short-dated bonds tip higher
 (Adds details)
 By Ka Yan Ng
 TORONTO, March 1 (Reuters) - The Canadian dollar retreated
from a three-year high against the U.S. currency on Tuesday
morning and short-dated bond prices perked up after the Bank of
Canada left interest rates unchanged and gave no signal it
plans to raise them soon.
 The Canadian dollar CAD=D4 fell as low as C$0.9735 to the
U.S. dollar, or $1.0272, after the bank's announcement from
C$0.9714, or $1.0294, just before, a level that matched
Monday's North American close.
 Early in the day it rose as high as C$0.9684 to the U.S.
dollar, or $1.0326, its highest level since November 2007.
 By 9:40 a.m. (1440 GMT), it was at C$0.9725 to the U.S.
dollar, or $1.0283.
 The interest rate-sensitive two-year bond CA2YT=RR turned
positive, edging up 4 Canadian cents to yield 1.824 percent.
 "The dollar is certainly weakening. I think you're seeing a
little bit of giveback in some of the (yield curve) short end
but mostly it's a Canadian dollar story at this point," said
David Tulk, chief Canada macro strategist at TD Securities.
 The Bank of Canada maintained its benchmark rate at 1
percent. It also repeated the language that it used in its
January rate announcement, saying that while considerable
monetary stimulus remains in place, "any further reduction in
monetary policy stimulus would need to be carefully
considered." For more see [ID:nBCL1EE72W].
 "They slightly upgraded their outlook for the Canadian
economy, acknowledging that the recovery has been proceeding
slightly faster than expected," said Paul Ferley, assistant
chief economist at Royal Bank of Canada.
 "However, they still expressed concerns about challenges
presented by persistent strength in the Canadian dollar and
Canada's poor productivity performance. On balance it suggests
no imminent rate move."
 Ferley said he still expects the central bank to lift rates
in May, matching the median view in a recent Reuters poll on
Canadian interest rates. [CA/POLL]
 Overnight index swaps, which trade based on expectations
for the key central bank rate, showed investors see a 92.2
percent probability that rates will stay on hold at the Bank of
Canada's next policy announcement date on April 12, up slightly
from before the announcement. Views of the chances of a May
hike fell slightly as well. BOCWATCH
 Analysts had been geared up for stronger language from the
central bank on the Canadian economic outlook after Monday's
fourth-quarter GDP data exceeded forecasts.
 The data signaled momentum in the economy, and had
bolstered the view that the central bank will resume hiking
interest rates in the first half of the year.  [ID:nN28244249]
 Before Tuesday's rate announcement, the Canadian dollar hit
its highest level since the start of the global financial
crisis as its U.S. counterpart came under broad selling
pressure on expectations that interest rates would rise more
quickly in other parts of the world than in the United
 There was also caution ahead of closely watched
congressional testimony from U.S. Federal Reserve Chairman Ben
Bernanke. [FRX]
  Over the near term, analysts said there are few technical
barriers stand in the Canadian currency's path, while firm oil
prices are a supporting factor. [ID:nN17237763]
 "Realistically, below this 97-cent level, there are few
technical spots. This is sort of reminiscent of last time we
were down here with oil skyrocketing and the Canadian dollar
following along," Curran said.
 "I don't think it'll be sustainable over the long period,"
he added.
 (Reporting by Ka Yan Ng, Solarina Ho and Claire Sibonney;
Editing by James Dalgleish and Peter Galloway)