CANADA FX DEBT-C$ nears parity as Fed stimulus decision looms

Tue Nov 2, 2010 4:55pm EDT
 
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   * C$ rises to 99.06 U.S cents
 * Investors eye central banks, U.S. elections, data
 (Updates to close)
 Claire Sibonney
 TORONTO, Nov 2 (Reuters) - Canada's currency climbed to
within a cent of parity with the U.S. dollar on Tuesday, as
markets bet the U.S. Federal Reserve will soon deliver a hefty
dose of monetary easing, which could further weaken the
greenback.
 Markets are generally priced for the U.S. central bank on
Wednesday to commit to buying between $80 billion and $100
billion worth of assets per month under a new program to
bolster the struggling economy. [ID:nNLLRLE6LL]
[ID:nN02172993]
 "If it's significantly more aggressive than that, we could
see another round of U.S. dollar selling, and that could very
easily push dollar/CAD back to parity or even beyond," said
Matthew Strauss, senior currency strategist at RBC Capital
Markets.
 The Canadian dollar CAD=D4 rose as high as C$1.0081 to
the U.S. dollar, or 99.20 U.S. cents, its strongest level in
more than two weeks. It eased slightly to finish at C$1.0095 to
the U.S. dollar, or 99.06 U.S. cents, up from C$1.0161 to the
U.S. dollar, or 98.42 U.S cents, at Monday's close.
 Earlier, the Canadian dollar got an extra lift from
Australia's surprising interest rate hike and some positive
economic news in the euro zone, as well as media speculation
regarding BHP Billiton's BHP.AX hostile $39 billion bid for
Potash Corp POT.TO. [ID:nN02206060]
 The currency pushed above parity with the U.S. dollar last
month but had no staying power, partly because the Bank of
Canada's last policy statement was more dovish than some had
expected.
 "We're just a penny shy of parity once again. What's going
to push us over? There's no shortage of event risks and
developments over the next few days that could," said Eric
Lascelles, chief Canada macro strategist, at TD Securities.
 Fears over a further U.S. dollar selloff were also
accentuated by Bill Gross, the manager of Pimco, the world's
largest bond fund, who told Reuters the U.S. currency is in
danger of losing 20 percent of its value over the next few
years if the Fed creates huge amounts of new money in a bid to
revive the economy.  [ID:nN01175131]
 Investors also awaited the results of U.S. midterm
elections on Tuesday and some analysts said a Republican win
could be positive for the U.S. currency on hopes for more
fiscal austerity and reduced government regulation.
 "The market has already largely priced in a House that will
be in Republican control, maybe even a Senate in Republican
control, so I think the impact from the elections on the
markets will be very limited," Strauss noted.
 "Going forward ... it will have implications for 2011
regarding fiscal policy and the likelihood of another stimulus
package," he said.
 This week's events pose strong potential for market swings
as investors will also absorb policy decisions from other
central banks and U.S. and Canadian monthly jobs data, due on
Friday.
 Strauss said, near term, a key support level for the U.S.
dollar versus Canada was C$0.9981, and resistance is seen at
C$1.0157.
 BONDS DIP
 Canadian government bond prices were mostly lower, taking a
wait-and-see approach ahead of Wednesday's Fed's decision. U.S.
Treasury prices rose in light volume as investors took
advantage of a recent rise in yields and covered short
positions. [US/]
 Fixed income strategists have said that while the prospect
of quantitative easing has recently pushed yields lower, that
has largely already been priced in. Although a more aggressive
move than anticipated should be met with another rally in
bonds.
 The two-year bond CA2YT=RR  fell 5 Canadian cents to
yield 1.436 percent, while the 10-year bond CA0YT=RR shed 38
Canadian cents to yield 2.883 percent.
 (Additional reporting by Ka Yan Ng; editing by Rob Wilson)