February 11, 2008 / 3:13 PM / 9 years ago

Loonie falls on rate cut outlook

4 Min Read

TORONTO (Reuters) - The Canadian dollar slipped against the U.S. dollar on Monday, but was rangebound after the Bank of Canada reiterated interest rates were likely to come down further despite recent data showing the Canadian economy has held up well in the face of the U.S. economic slowdown.

Canadian bond prices followed the larger U.S. Treasury market higher after U.S. equities opened lower.

At 9:40 a.m. EST the Canadian dollar was at 99.80 U.S. cents valuing a U.S. dollar at C$1.0020, up from US$1.0002, valuing a U.S. dollar at 99.98 Canadian cents at Friday's close.

The Canadian dollar held to a tight range of US$1.0010, valuing a U.S. dollar at 99.90 Canadian cents, and 99.80 U.S. cents, making a greenback worth C$1.0020.

"It doesn't seem like there is much out there that's going to drive us out of this range just hovering either side of parity," said Camilla Sutton, currency strategist at Scotia Capital.

Bank of Canada Governor Mark Carney said on Saturday additional interest rate cuts may be needed in Canada as the economy is expected to slow in the face of the U.S. economic downturn.

Carney's comments came despite a jobs report last week that was four times stronger than expected, suggesting the domestic economy is still booming.

The jobs report, which also showed that the unemployment rate returned to October's 33-year low of 5.8 percent, boosted the Canadian dollar by well over a cent to back above parity with the greenback.

But the prospect of lower interest rates in Canada limited the currency's gains.

The Bank of Canada has cut its overnight lending rate by 25 basis point at each of its past two meetings, to 4.00 percent.

Meanwhile, the U.S. Federal Reserve has lowered its key lending rate by 225 basis points, to 3.00 percent, to stimulate growth as its economy slows amid a housing sector crisis.

Despite the 1 percent interest rate differential in the Canadian dollar's favor, and a strong domestic economy, the economy is expected to soften in light of the U.S. economic downturn.

Exports make up around 40 percent the Canadian economy and the United States takes in around 75 percent of Canadian exports.

Data on Monday showed the price of new homes in Canada rose by 0.1 percent in December over November and 6.2 percent from December 2006, the first time in 16 months that year-over-year growth increased, Statistics Canada said on Monday.

Market analysts had on average predicted that prices would rise by 0.3 percent in December over November.

Bonds Flat to Higher

Canadian bond prices were higher in line with the larger U.S. Treasuries market after the Dow Jones Industrial Index opened in the red.

The Canadian bond market is underperforming its U.S. counterpart, mainly due to Carney's comments that Canadian interest rates were headed lower, said Mark Chandler, fixed income strategist at RBC Capital Markets.

The overnight Canadian Libor rate was at 4.0500 percent, down from 4.0600 percent on Friday.

Friday's CORRA rate was 4.0032 percent, up from 4.0007 percent on Thursday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.

The two-year bond was flat at C$102.05 to yield 3.069 percent. The 10-year bond increased 5 Canadian cents to C$101.43 to yield 3.815 percent.

The yield spread between the two- and 10-year bond was 75.0 basis points, up from 74.6 points at the previous close.

The 30-year bond rose 23 Canadian cents to C$113.78 to yield 4.178 percent. In the United States, the 30-year treasury yielded 4.404 percent.

The three-month when-issued T-bill yielded 3.25 percent, down from 3.28 percent at the previous close.

Editing by Bernadette Baum

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