Canada dollar slumps on BoC rate cut, bonds mixed

Tue Mar 4, 2008 5:05pm EST
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 By John McCrank
 TORONTO, March 4 (Reuters) - The Canadian dollar tumbled
lower against the U.S. dollar on Tuesday, after the Bank of
Canada slashed its key interest rate and signaled more easing
down the road.
 Domestic bond prices rallied on the short end of the curve
given the bank's dovish tone.
 The Canadian dollar closed at US$1.0049, valuing a U.S.
dollar at 99.51 Canadian cents, down from US$1.0118, valuing a
U.S. dollar at 98.83 Canadian cents, at Monday's close.
 It was the commodity-linked currency's third straight
losing session, handing back most of the gains it made last
week when it rallied with rising oil, gold, wheat, and base
metal prices.
 The Bank of Canada cut its key rate by 50 basis points to
3.50 percent, the biggest cut since 2001. But that was not a
surprise, as most primary dealers were expecting the aggressive
move, according to a Reuters poll taken on Friday.
 "It was maybe not so much the decision to cut 50, but the
tone of the statement that sounded quite dovish and that more
cuts were certainly on the horizon," said Camilla Sutton,
currency strategist at Scotia Capital.
 The statement accompanying the announcement emphasized the
downside risks to Canada's economy due to the U.S. economic
downturn, which it said was likely to be more prolonged than
the central bank had projected in January.
 As in January, the bank said further monetary stimulus is
likely to be required, but this time, the bank left out any
reference to the economy picking up in the later half of the
 The Canadian dollar is now back in the range it had been in
prior to last week, hovering near parity with the greenback.
 "I think the same old story remains intact where it's in
this tug-of-war between the U.S. weakening economic outlook and
the negative impact that has on Canada versus commodities, even
though they're off today, being generally very strong on
historical levels," said Sutton.
 Canadian bond prices moved higher on the short end of the
curve in response to the Bank of Canada's dovish tone.
 "The additional movement in CBGs (Canadian government
bonds) largely stemmed from the fact that new governor Carney
said that further monetary stimulus would likely be required in
the near term," said Max Clarke, economist at IDEAglobal in New
 The question many in the market are now asking is, how big
will the next cut be?
 The Bank of Canada tended to take a gradual approach in
setting monetary policy under previous Governor David Dodge,
but with a 50 basis-point cut in Carney's first decision as
governor, the door is now wide open.
 "There is a new Captain of the ship and things might be
changing," said Clarke, who said the market was pricing in a 20
percent chance that the central bank will cut by 75 basis
points when it next sets policy.
 The two-year bond was up 6 Canadian cents at C$102.64 to
yield 2.683 percent. The 10-year bond slipped 9 Canadian cents
to C$102.89 to yield 3.628 percent.
 The yield spread between the two- and 10-year bond was 94.5
basis points, up from 90.2 points at the previous close.
 The 30-year bond dropped 55 Canadian cents to C$115.00 to
yield 4.113 percent. In the United States, the 30-year Treasury
yielded 4.504 percent.
 The three-month when-issued T-bill yielded 2.90 percent,
down from 2.98 percent at the previous close.
 (Editing by Renato Andrade)