December 9, 2008 / 4:00 PM / 9 years ago

CANADA FX DEBT-C$ falls, bonds soar after rate cut

* Bank of Canada cuts rates 75 bps to 50-yr low of 1.5 pct

* Canadian dollar weakens after rate cut

* Bonds rise, short end surges as BoC declares recession

TORONTO, Dec 9 (Reuters) - The Canadian dollar fell hard against the U.S. dollar on Tuesday after the Bank of Canada cut its key interest rate by a bigger-than-expected 75 basis points.

Canadian bond prices surged, reflecting expectations of further rate cuts to come as the economy weakens.

At 10:20 a.m. (1520 GMT), the currency was at C$1.2682 to the U.S. dollar, or 78.85 U.S. cents, down from C$1.2540 to the U.S. dollar, or 79.74 69 U.S. cents, at Monday’s close.

The Canadian dollar fell as low as C$1.2743 after the rate decision from C$1.2640, just before the Bank of Canada cut its key interest rate to a 50-year low of 1.50 percent and the bank also declared the Canadian economy to be in a recession. [ID:nN092350]

The market had expected a cut of at least a 50 basis points on Tuesday but talk had been growing that there would be more aggressive action.

“The Canadian dollar was trading under the expectation they were going to cut rates by half a point. The fact that they’ve done a bigger cut makes the Canadian dollar look less attractive on an international basis,” said Craig Alexander, deputy chief economist at TD Bank.

Meanwhile, oil headed towards $44 a barrel, supported by mounting expectations that OPEC will announce further output cuts at its meeting next week. The Canadian dollar often tracks crude prices closely due to Canada’s big oil exports.

SHORT-END SOARS

Canadian bonds were mixed, with the short end of the curve up sharply as the market expects to Bank of Canada to cut rates again. The long end was nearly flat.

Unlike previous statements, the bank did not explicitly signal further cuts were necessary but it appeared to leave the door open to additional easing in 2009. With a softening economy, market players expect additional easing early next year.

“The short end of the yield curve has come down reflecting the fact that short-term rates are going to be lower than they had previously anticipated,” Alexander said.

The two-year bond rose 14 Canadian cents to C$102.39 to yield 1.521 percent. The 10-year bond fell 11 Canadian cents to C$109.40 to yield 3.097 percent.

The yield spread between the two-year and 10-year bond was at 159 basis points, up from 151 basis points at the previous close.

The 30-year bond lost 5 Canadian cents to C$121.35 to yield 3.770 percent. In the United States, the 30-year treasury yielded 3.1385 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)

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