UPDATE 1-Canadian dollar stumbles after BoC rate cut

Tue Mar 4, 2008 10:16am EST
 
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 By Frank Pingue
 TORONTO, March 4 (Reuters) - The Canadian dollar skidded to
its lowest level in a week against the U.S. dollar on Tuesday
after the Bank of Canada lowered its key interest rate and
signaled further rate cuts are to come.
 Domestic bond prices, which rallied for much of the past
week in anticipation of the bank's first 50-basis-point cut
since late 2001, rallied on the short end of the curve given
the bank's dovish tone.
 At 10:00 a.m. (1500 GMT), the Canadian dollar was at
US$1.0081, valuing a U.S. dollar at 99.20 Canadian cents, down
from US$1.0116, valuing a U.S. dollar at 98.85 Canadian cents,
ahead of the bank's rate announcement.
 The currency closed at US$1.0118, valuing a U.S. dollar at
98.83 Canadian cents, on Monday.
 The Bank of Canada did as expected and lowered its key rate
by 50 basis points to 3.50 percent, but its statement left the
door wide open for further rate cuts given the damaging effects
of the U.S. slowdown.
 In its statement, the central bank said further monetary
stimulus is likely required as the nagging U.S. economic
slowdown has outweighed the "upside risks" of strong domestic
demand and capacity pressures.
 "What caught the market by surprise was the dovish
statement afterward which clearly opens the way for further
monetary easing and even aggressive easing," said Matthew
Strauss, senior currency strategist at RBC Capital Markets.
 "So we could see similar cuts to what we've seen today if
the economic outlook continues to deteriorate."
 The currency is now on track for its third straight losing
session, during which it has handed back nearly all of the 2.9
percent gain recorded last week as commodity prices rallied.
 BONDS HIGHER
 Canadian bond prices moved higher on the short end of the
curve immediately after the Bank of Canada statement filtered
through the market.
 "The fact that the statement called for continued easing
down the road, they kept the same bias that they had before,
helped," said Mark Chandler, fixed income strategist at RBC
Capital Markets. "Some of it had become priced in over the last
week but you still got a positive impact on bonds."
 The overnight Canadian Libor rate LIBOR01 was 3.7433
percent, down from 4.053 percent on Monday.
 Monday's CORRA rate CORRA= was 4.0107 percent, down from
4.0191 on Friday. The Bank of Canada publishes the previous
day's rate at around 9 a.m. daily.
 The two-year bond was up 7 Canadian cents at C$102.65 to
yield 2.676 percent. The 10-year bond slipped 3 Canadian cents
to C$102.95 to yield 3.620 percent.
 The yield spread between the two- and 10-year bond was 94.4
basis points, up from 90.2 points at the previous close.
 The 30-year bond dipped 30 Canadian cents to C$115.25 to
yield 4.100 percent. In the United States, the 30-year Treasury
yielded 4.447 percent.
 The three-month when-issued T-bill yielded 2.95 percent,
down from 2.98 percent at the previous close.
 (Reporting by Frank Pingue; Editing by Bernadette Baum)