Canada dollar falls on rate outlook, bonds sag

Wed Dec 5, 2007 9:49am EST
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 By John McCrank
 TORONTO, Dec 5 (Reuters) - The Canadian dollar fell against
the U.S. dollar on Wednesday, hitting levels not seen since
mid-September, as the market continued to adjust to a Bank of
Canada interest rate cut and pondered the possibility of more
to come.
 Canadian bond prices, with no domestic data to go on,
followed the larger U.S. Treasury market lower.
 At 9:15 a.m. (1415 GMT), the Canadian dollar was at 98.62
U.S. cents, valuing each U.S. dollar at C$1.0140, down from
98.77 U.S. cents, or C$1.0124, at Tuesday's North American
 The Canadian dollar traded as low as 97.90 U.S. cents, down
more than 11 percent from its modern day high of US$1.1039 hit
on Nov. 7.
 The currency continued its slide after the Bank of Canada,
surprising some market players, cut its key overnight rate on
Tuesday by 25 basis points to 4.25 percent.
 "Canada certainly still continues to be the poor cousin,
and the Bank of Canada yesterday being a little bit dovish even
after they cut, has really put more of a damper on the Canadian
dollar in the short run," said Steve Butler, director of
foreign exchange at Scotia Capital.
 In its statement, the central bank put more emphasis on
risks to economic growth than it did on inflation, potentially
opening the door to more rate cuts down the road.
 Lower interest rates generally make a currency less
attractive to investors.
 The U.S. Federal Reserve makes its interest rate
announcement next week, and some analysts are expecting a 50
basis point cut to the fed funds rate, but that wouldn't
necessarily spur a rally in the faltering Canadian dollar.
 That's because if the Fed cuts by half a percentage point,
it will be seen almost as panic cut, signaling that there are a
lot more risks out there to Canada's biggest trading partner,
Butler said.
 "So there may be a short-term gain for the Canadian dollar,
but at the end of the day, to me, it's pointing to a lot more
potential woes for the U.S. economy and it might be a bit of a
sell North America at that point."
 The market is also betting on an interest rate cut by the
Bank of England on Thursday.
 Short-term Canadian bond prices tumbled, in line with the
larger U.S. Treasury market, as a stronger-than-expected U.S.
private jobs report pointed to a possible uptick in U.S. jobs
numbers later in the week.
 A strong jobs report on Friday would reduce expectations of
aggressive interest rate easing by the Fed.
 In Canada, incoming Bank of Canada Governor Mark Carney
makes an appearance before a parliamentary committee on
Wednesday, followed by current Bank of Canada Governor David
Dodge on Thursday.
 The overnight Canadian Libor rate LIBOR01 was at 4.2550
percent, down from 4.4417 percent on Tuesday.
 Tuesday's CORRA rate CORRA= was 4.3422 percent, down from
4.5433 percent on Monday.
 The two-year bond slid Canadian cents to C$101.34 to yield
3.542 percent. The 10-year bond declined 19 Canadian cents to
C$100.82 to yield 3.896 percent.
 The yield spread between the two-year and 10-year bond
moved to 35.6 basis points from 38.2 at the previous close.
 The 30-year bond dropped 19 Canadian cents to C$115.34 to
yield 4.099 percent. In the United States, the 30-year treasury
yielded 4.336 percent.
 The three-month when-issued T-bill yielded 3.83 percent
unchanged from the previous close.