Canadian dollar rattled by Bank of Canada rate cut

Tue Dec 4, 2007 4:46pm EST
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 By Frank Pingue
 TORONTO, Dec 4 (Reuters) - The Canadian dollar finished at
its lowest level in 11 weeks versus the greenback on Tuesday as
the Bank of Canada went against market expectations and cut its
key interest rate for the first time since early 2004.
 Canadian bond prices closed higher across the short end of
the curve, but the bank's lack of signals regarding what it
will do when it sets policy in January ate away at the gains as
the session wore on.
 The Canadian dollar closed at 98.77 U.S. cents, valuing
each U.S. dollar at C$1.0124, down from 99.98 U.S. cents, or
C$1.0002, at Monday's North American close.
 The Canadian dollar hit a session low of 98.49 U.S. cents,
or C$1.0153, right after the Bank of Canada lowered its
overnight rate to 4.25 percent from 4.50 percent.
 In the statement that accompanied its decision, the bank
delivered a more dovish tone than it did when it left interest
rates unchanged in October.
 "Not only did they surprise the market but they also
included a statement whose tone was somewhat dovish," said
David Powell, currency analyst at IDEAglobal in New York.
 "In other words, they left the door open for further cuts
in the first quarter of next year and likely into the second
quarter as well."
 The Bank of Canada said it expects the U.S. subprime
mortgage market and financial market fallout to drag on longer
than expected.
 The Canadian dollar is now well off the modern-day high of
US$1.1039 that it reached on Nov. 7, bogged down by a sudden
wave of weak domestic data and also by concerns with the global
economic picture.
 Short-term Canadian bond prices rallied on the interest
rate cut, but the lack of central bank signals on whether it
will continue easing in the near future may have limited
 Now, direction in the the bond market will likely be
dictated by an appearance before a parliamentary committee on
Wednesday by Bank of Canada Governor Designate Mark Carney and
by Bank of Canada Governor David Dodge on Thursday.
 "If there is a greater degree of worry in either Mark
Carney's testimony (Wednesday) or Governor Dodge's on Thursday.
then there is the chance for the market to do better on those
comments," said Mark Chandler, fixed income strategist at RBC
Capital Markets.
 Both Carney and Dodge will be speaking ahead of key jobs
data due out of Canada and the United States on Friday.
 The two-year bond rose 13 Canadian cents to C$101.45 to
yield 3.485 percent. The 10-year bond climbed 18 Canadian cents
to C$101.05 to yield 3.867 percent.
 The yield spread between the two-year and 10-year bond
moved to 38.2 basis points from 33.1 at the previous close.
 The 30-year bond dropped 16 Canadian cents to C$115.66 to
yield 4.080 percent. In the United States, the 30-year treasury
yielded 4.336 percent.
 The three-month when-issued T-bill yielded 3.83 percent,
down from 3.91 percent at the previous close.