June 2, 2008 / 1:34 PM / 9 years ago

Canadian dollar rattled by talk of BOC rate cut

TORONTO (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

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