RPT-CANADA FX DEBT-BOC rate outlook bruises C$, lifts bonds

Tue Mar 1, 2011 5:11pm EST
 
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 * Bank of Canada gives no hint of next rate hike
 * C$ finishes at $1.0257, near session low
 * Short-dated bonds gain strongly
 (Adds full name of analyst in 2nd last para)
 By Ka Yan Ng
 TORONTO, March 1 (Reuters) - The Canadian dollar retreated
from a more than three-year high against the U.S. currency on
Tuesday and short-dated bond prices drove higher after the Bank
of Canada left interest rates unchanged and gave no signal it
plans to raise them soon.
 The central bank 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].
 "If that was taken out, people would have started looking
perhaps for a Bank of Canada rate hike as early as the next
meeting," said Shane Enright, executive director, foreign
exchange sales, at CIBC World Markets.
 "The market had got a little bit ahead of itself but I
think the sentiment is still very positive for Canada."
 The Canadian dollar CAD=D4 fell as low as C$0.9756 to the
U.S. dollar, or $1.0250, after the rate announcement while the
interest rate-sensitive two-year bond CA2YT=RR rallied 9
Canadian cents to yield 1.793 percent, reflecting sentiment
that the central bank may now move on rates later than
thought.
 Earlier it had risen as high as C$0.9684 to the U.S.
dollar, or $1.0326, its highest point since November 2007. It
closed at C$0.9749 to the U.S. dollar, or $1.0257, not far off
the session low and down from Monday's North American close of
C$0.9714 to the U.S. dollar, or $1.0294.
 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]
 SWAPS SCALED BACK
 Market expectations were scaled back after the Bank of
Canada said the Canadian recovery was moving a bit faster than
it expected, but tempered that with concern about the
"persistent strength" of the Canadian dollar and Canada's poor
productivity performance.
 "On balance it suggests no imminent rate move," said Paul
Ferley, assistant chief economist at Royal Bank of Canada.
 Overnight index swaps, which trade based on expectations
for the key central bank rate, showed investors see a 92
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
 Before the 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 States.
  Over the near term, analysts said 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," said John Curran, senior vice president at
CanadianForex.
 "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)