CANADA FX DEBT-C$ drops on dovish Bank of Canada stance

Tue Dec 7, 2010 4:44pm EST
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 * C$ closes at 98.87 U.S. cents
 * Bonds lower but outperform Treasuries
 (Updates to close, adds details, quotes)
 By Claire Sibonney
 TORONTO, Dec 7 (Reuters) - The Canadian dollar retreated
more than penny against the greenback on Tuesday as a global
risk rally faded and the market digested a dovish statement
from the Bank of Canada, which held interest rates unchanged
for a second straight time.
 The central bank, as expected, set the stage for keeping
its key rate target at 1 percent well into next year by
emphasizing its concern over weaker exports and the risks posed
by Europe's debt woes. [ID:nN07106511]
 "The Bank of Canada was clearly a catalyst initially to get
the ball rolling on dollar/Canada bids but the market has been
taking back dollar shorts pretty well all day long," said Jack
Spitz, managing director of foreign exchange at National Bank
 "Again, (the Bank of Canada was) focusing on the strength
of the Canadian dollar, the impact on net exports, the sluggish
U.S. economy," said David Watt, senior fixed income and
currency strategist at RBC Capital Markets.
 "So they didn't go out of their way to indicate they are
uncomfortable on the sidelines."
 Overnight, the currency had flirted with parity with the
greenback, climbing to a high of C$1.0011 to the U.S. dollar,
or 99.89 U.S. cents, as global equities and commodities rallied
on the back of a U.S. tax deal and optimism that Ireland would
pass an austerity budget, later detailed as the toughest on
 However, North American equity markets failed to sustain
the run-up in Europe and gold and copper prices backed off,
partly due to investors taking profits on doubts the U.S.
tax-cut extension would be pushed through and on uncertainty
over a series of Irish budget votes this week.
 Watt noted the Canadian currency was performing worse than
its commodity-linked peers, such as the Australian dollar,
going into the Bank of Canada announcement. It was trading
instead in a way similar to safe-haven currencies such as the
yen and Swiss franc, which were lagging.
 "In the past, we've sort of indicated the Canadian dollar
looks very much like a safe haven in a good way and today it
looks like a safe haven in a bad way," he said.
 The Canadian dollar CAD=D4  closed the North American
session at C$1.0114 to the U.S. dollar, or 98.87 U.S. cents,
down from Monday's close at C$1.0053 to the U.S. dollar, or
99.47 U.S. cents
 Watt noted the Canadian dollar was still trading in a
fairly tight range, with significant U.S. dollar support eyed
around a November low of C$0.9977 and resistance at the 50-day
moving average of C$1.0150.
 Canadian bond prices were also down, tracking U.S.
Treasuries in a steep selloff as investors moved out of the
market. [US/]
 However, Canadian bonds outperformed their U.S.
counterparts across most of the curve with the cautious Bank of
Canada statement capping the losses.
 The two-year bond CA2YT=RR was down 13 Canadian cents to
yield 1.629 percent, while the 10-year bond CA10YT=RR dropped
85 Canadian cents to yield 3.229 percent.
  (Editing by Peter Galloway)