Canadian dollar ends volatile session down a touch

Tue Jun 10, 2008 5:14pm EDT
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 * Canadian dollar unable to hang on to early gains
 * Bank of Canada unexpectedly keeps key rate steady
 * Bond prices rattled by hawkish central bank talk
 By Frank Pingue
 TORONTO, June 10 (Reuters) - The Canadian dollar fell in a
volatile session on Tuesday as lower oil prices and a rallying
greenback ate away at sharp gains it recorded after a surprise
Bank of Canada decision to keep its key interest rate steady.
 Canadian bond prices were pinned lower across the curve for
the entire session as a signal from the Bank of Canada that it
may have ended its rate-cutting cycle followed hawkish comments
from other central banks over the past week.
 The Canadian dollar closed at C$1.0224 to the U.S. dollar,
or 97.81 U.S. cents, down from C$1.0216 to the U.S. dollar, or
97.89 U.S. cents, at Monday's close.
 A sharp drop in oil prices together with a rallying U.S.
dollar dragged the Canadian currency from a session high of
C$1.0196 to the U.S. dollar, or 98.08 U.S. cents.
 Early in the session the Canadian dollar charged more than
one U.S. cent higher after the Bank of Canada said it would
keep its overnight rate steady at 3.00 percent. In a recent
Reuters poll, all 12 of Canada's primary dealers had forecast a
cut of 25 basis points.
 "The Bank of Canada rate decision caught pretty much the
entire market off guard in the sense that people were fairly
unanimous in looking for a quarter-point rate cut," said George
Davis, chief technical strategist at RBC Capital Markets.
 "The fact that we didn't get the rate cut obviously allowed
the Canadian dollar to rally fairly significantly and (the U.S.
dollar) got down to the C$1.0196 area as the low and then we
sort of bounced off that price point."
 Davis also said a $3 a slide in the price of a barrel of
oil weighed on the Canadian dollar since Canada is a major
exporter of oil. He also said the greenback's surge widened the
Canadian dollar's losses.
 In the statement that accompanied its decision, the Bank of
Canada said there is a greater risk that inflation will be
higher than it projected in April because of
stronger-than-expected global growth and commodity prices.
 The Bank of Canada's decision to leave rates steady ended a
five-month campaign during which it slashed its key lending
rate by a combined 150 basis points.
 Canadian bond prices, which have been reeling in recent
sessions because of hawkish comments from the U.S. Federal
Reserve and the European Central Bank, added to the losses as
the Bank of Canada moved to a similar stance.
  U.S. Federal Reserve Chairman Ben Bernanke suggested the
Fed could raise rates to support the greenback and dissipate
any inflationary pressure.
 Also, the European Central Bank has said interest rates in
the euro zone could rise as soon as next week.
 "Bernanke's speech last night was relatively hawkish, he's
definitely growing less concerned about the economy and more
worried about inflation," said Sal Guatieri, senior economist
at BMO Capital Markets, "And, of course, the Bank of Canada's
stunning announcement this morning not to cut interest rates
and to announce it now has a slight tightening bias."
 The two-year bond dropped 61 Canadian cents to C$100.67 to
yield 3.395 percent. The 10-year bond fell C$1.05 to C$101.24
to yield 3.847 percent.
 The yield spread between the two-year and 10-year bond was
45.2 basis points, down from 63.2 at the previous close.
 The 30-year bond fell 94 Canadian cents to C$113.89 for a
yield of 4.169 percent. In the United States, the 30-year
Treasury yielded 4.702 percent.
 The three-month when-issued T-bill yielded 2.80 percent,
down from 2.56 percent at the previous close.
 (Editing by Peter Galloway)