March 2, 2010 / 9:59 PM / in 8 years

CANADA FX DEBT-C$ rises for third day, short bonds fall

* C$ ends up at 96.48 U.S. cents, off 6-week high

* Short-term bonds hold lower, lag U.S. Treasuries

* Bank of Canada holds rates, sees no early hike (Adds details)

By Ka Yan Ng

TORONTO, March 2 (Reuters) - Canada’s currency jumped against the U.S. dollar on Tuesday after the Bank of Canada left interest rates unchanged, but it finished off the six-week high it hit earlier in the day, while short-term bonds held lower.

The Canadian dollar rose to C$1.0309 to the U.S. dollar, or 97 U.S. cents, a six-week high, soon after the central bank rate decision as market players detected what they interpreted as a shift to a slightly more hawkish tone in the bank’s statement.

The currency pared those gains slowly throughout the day but still ended higher for a third straight session as firm oil prices, hope of resolution to Greece’s debt problems, and gains on equity markets lent support.

Monday’s stronger-than-expected economic growth data continued to play a supporting role as well.

“It’s been three days in a row now of basically one-way traffic,” said Steve Butler, director of foreign exchange trading at Scotia Capital. “It rebuffed (the C$1.03 level) today I think just partly because we’re suffering a little bit of fatigue. We’ve bounced a little bit for now.”

The Canadian dollar finished at C$1.0365 to the U.S. dollar, or 96.48 U.S. cents, up from C$1.0416 to the U.S. dollar, or 96.06 U.S. cents, at Monday’s close.

Butler said he expects the Canadian dollar’s positive momentum to continue, even with a looming federal budget on Thursday that will likely forecast a budget deficit of C$45 billion for the 2010-11 fiscal year.

Risks this week to the momentum also lie in developments on the Greek front, the European Central Bank’s interest rate announcement on Thursday, and the U.S. nonfarm payroll numbers for February on Friday.

Earlier on Tuesday, the Bank of Canada acknowledged stronger-than-expected economic growth and inflation, and it also removed a reference to downside risks to its inflation outlook that had been present in previous statements, all of which hinted at a slightly more hawkish bent. [ID:nN02149877]

“It’s a subtle but important change,” said Matthew Strauss, senior currency strategist at RBC Capital Markets. “By now saying (risks to inflation outlook is) roughly balanced, the underlying dovish tone has disappeared and made way for a neutral statement.”

SHORT-END FALLS

Interest rate-sensitive short-dated government bonds were lower on Tuesday as the market prepared for interest rates to come off record lows.

Although the central bank continued to uphold its conditional commitment to keep rates at their current low level until the end of June, it appeared also to prime markets for a stronger signal about the timing of eventual rate hikes.

“Right now I think it’s setting the stage to an upgrade to its GDP forecast when we get its next round of official projections in April,” said Jonathan Basile, an economist at Credit Suisse in New York.

The two-year Canadian government bond CA2YT=RR slipped 4 Canadian cents to C$100.25 to yield 1.372 percent, while the 10-year bond CA10YT=RR gained 16 Canadian cents to C$102.70 to yield 3.407 percent.

Canadian bonds outperformed their U.S. counterparts on the long end, but lagged on the short end, as the difference between 10-year yields moved to 22 basis points from 20.5 basis points on Monday. (Editing by Peter Galloway; editing by Peter Galloway)

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