Canadian dollar rattled by talk of BOC rate cut

Mon Jun 2, 2008 4:35pm EDT
 
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 * Canada dollar dips 0.8 pct, ends below US dollar parity
 * Talk of Bank of Canada rate cut takes center stage
 * Bond prices high ahead of key jobs data this week
 By Frank Pingue
 TORONTO, June 2 (Reuters) - The Canadian dollar fell nearly
1 percent versus the U.S. dollar on Monday as talk of a Bank of
Canada rate cut picked up steam following the unexpectedly weak
gross domestic data released late last week.
 Canadian bond prices, with no fresh economic data to spark
a move, followed the bigger U.S. Treasury market higher across
the curve as Standard & Poor's downgraded the ratings of three
U.S. investment banks.
 The Canadian dollar closed at C$1.0012 to the U.S. dollar,
or 99.88 U.S. cents, down 0.8 percent from US$1.0070, valuing a
U.S. dollar at 99.30 Canadian cents, at Friday's close.
 During the session the Canadian dollar fell as low as
C$1.0028 to the U.S. dollar, or 99.72 U.S. cents, its lowest
level in just over two weeks and also its first stint below
parity versus the greenback since May 16.
 The drag on the Canadian dollar was traced back to Friday,
when data showed the Canadian economy shrank unexpectedly in
the first quarter, denying the currency a chance to extend a
three-week streak of rises.
 "It's a lingering impact of last week's Q1 GDP report,"
said Paul Ferley, assistant chief economist at Royal Bank of
Canada. "That has reinforced expectations of interest rate cuts
here in Canada as opposed to the U.S., where there seems to be
dwindling expectations of near-term moves by the Fed."
 Last week's gross domestic product data reignited talk of a
25-basis-point interest rate cut by the Bank of Canada, which
will make its next scheduled interest rate announcement on June
10.
 The Bank of Canada has lowered its key overnight rate 150
basis to 3.00 percent since December. The U.S. Federal Reserve
has staged a much more aggressive rate-cutting campaign but is
expected to stand pat for now.
 The decline in the commodity-linked Canadian currency was
cushioned somewhat by oil prices, which rebounded from losses
suffered earlier in the session.
 BOND PRICES RISE
 Canadian bond prices finished higher across the curve due
in large part to news that S&P cut the credit ratings of Lehman
Brothers, Merrill Lynch and Morgan Stanley.
 But the rise was kept in check as dealers avoided major
commitments as they waited for key data due out later in the
week.
 May employment data for Canada is not due until Friday and
marks the last major piece of data before the Bank of Canada's
June 10 rate announcement. May jobs data for the United States
is also due on Friday.
 "A pretty modest move in bond prices as markets await the
key employment reports out later in the week," Ferley said.
 The two-year bond rose 22 Canadian cents to C$101.64 to
yield 2.897 percent. The 10-year bond climbed 58 Canadian cents
to C$102.78 to yield 3.635 percent.
 The yield spread between the two- and 10-year bond was 73.8
basis points, up from 70.4 at the previous close.
 The 30-year bond gained 91 Canadian cents to C$115.46 for a
yield of 4.085 percent. In the United States, the 30-year
treasury yielded 4.673 percent.
 The three-month when-issued T-bill yielded 2.63 percent,
down from 2.68 percent at the previous close.
 (Editing by Peter Galloway)