Canadian dollar falls ahead of BoC announcement

Tue Jun 10, 2008 8:20am EDT
 
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 * 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) ((john.mccrank@thomsonreuters.com; +1 416 941 8083; Reuters
Messaging: john.mccrank.reuters.com@reuters.net))
 For Reuters bond and money market pricing information
double click on one of the following:
 CAD=      Canadian dollar live quote, high/low
  FXNEWS  Headlines from global forex markets
 CDBN      Canadian bond prices
 CDMM CDMN <0#CAMMKT=> Canadian money market prices
 CABONEA   Canada-U.S. spreads (live)
 YLDS1     World yield index
 CA30YT=RR 30 year benchmark
 <0#CGB:> CGBc1 <CA/FACTOR1> MEIRP - Montreal Exchange
bond futures pricing information
 CAMCI=    Bank of Canada monetary conditions index (Reuters
calculation)
 CACALL=   Canada's call loan or overnight lending rate
 =CAD      Canadian dollar G10 trade-weighted index.
For the fixed-income market speed guides, double click on
one of the following:
  <CA/MMKT1> <CA/MMKT2> <CA/DEBT> BONDS TREASURY For
related news, double click on one of the following:
 [CAN]  Canadian news
 [NAT]  North American Treasuries news
 [M]    Money news
 [D]    Debt news
 [MF]   Markets news
 [GVD]  Government debt news
 [MMT]  Money market news
 [INT]  Interest rate news
 [CEN]  Central bank news
 [CA/]  Canadian bond market stories