Canadian dollar falls ahead of BoC announcement
* Canadian dollar drops as much as 1 pct versus greenback
* Focus on Bank of Canada rate move, statement
* Bond prices fall on Bernanke inflation comments
By John McCrank
TORONTO, June 10 (Reuters) - The Canadian dollar fell as much as one percent overnight against the U.S. dollar ahead of a scheduled interest rate announcement by the Bank of Canada, which is expected to cut its key lending rate by 25 basis points.
Domestic bond prices fell on the back of expectations of rising interest rates in the United States.
At 8:02 a.m. (1202 GMT), the Canadian dollar was at C$1.0291 to the U.S. dollar, or 97.17 U.S. cents, down from C$1.0216 to the U.S. dollar, or 97.89 U.S. cents, at Monday's close.
The currency fell to as low as C$1.0324, or 96.86 U.S. cents, its lowest since April 1, and just a few one-hundredths of a cent shy of its softest level since Jan. 22, when the Bank of Canada slashed its overnight rate by 50 basis points and the U.S. Federal Reserve unexpectedly cut its key rate by 75 basis points.
"The big move was on the U.S. dollar side, with the U.S. dollar extending its broad-based rally off of Bernanke's comments last night," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
Bernanke said on Monday that the Fed would strongly resist rising inflation expectations and that the recent surge in energy prices was intensifying price pressures.
His comments stoked expectations for U.S. interest rate increases, just as the Bank of Canada prepares to cut rates.
"The market is also concerned about the (Bank of Canada's) interest rate decision and the comments following the decision, that they might be more dovish than expected and not neutral," said Strauss.
The market has fully priced in a Bank of Canada cut of 25 basis points, to 2.75 percent, but the accompanying statement will be very closely scrutinized.
Strauss said the market would be looking for two key phrases, or rather their absence, to judge whether the central bank was preparing to move to the sidelines, or if it was planning more rate cuts.
Those phrases are, 'the risks appear to be balanced', and 'further monetary stimulus will likely be required over the medium term.'
"Especially if they keep the second phrase, that could really weigh on the Canadian dollar," said Strauss.
Conversely, if the central bank were to put more emphasis on inflation, the Canadian dollar could strengthen, he said.
The Bank of Canada has cut its key rate by 150 basis points since December.
BOND PRICES FALL
Canadian bond prices continued their selloff from Monday.
"Yesterday's price action just continues to push into today and it's got to be the two biggest back-to-back days we've seen in absolute years," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"What seems to be driving it today is the Bernanke speech overnight that did come across as quite hawkish, expressing some concern for inflation, downplaying the economic weakness, not explicitly talking about rate hikes, but leaving that sort of taste in the market's mouth."
The overnight Canadian LIBOR rate LIBOR01 was at 2.8467 percent, down from 2.9867 percent on Monday.
The two-year bond fell 17 Canadian cents to C$101.11 to yield 3.164 percent. The 10-year bond dropped 13 Canadian cents to C$102.07 to yield 3.726 percent.
The yield spread between the two-year and 10-year bond was 56.2 basis points, down from 63.2 at the previous close.
The 30-year bond fell 1 Canadian cent to C$114.82 for a yield of 4.119 percent. In the United States, the 30-year Treasury yielded 4.631 percent.
The three-month when-issued T-bill yielded 2.63 percent, up from 2.56 percent at the previous close. (Editing by Bernadette Baum) ((firstname.lastname@example.org; +1 416 941 8083; Reuters Messaging: email@example.com))
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