CANADA FX DEBT-C$ closes at 5-week high after Fed rate cut

Tue Dec 16, 2008 4:34pm EST
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 * Canadian dollar rallies to highest level since Nov. 12
 * Bulk of gains recorded after Fed slashes target rate
 * Bond prices all end higher alongside U.S. market
 By Frank Pingue
 TORONTO, Dec 16 (Reuters) - The Canadian dollar closed at
its highest level in 5 weeks against the U.S. dollar on Tuesday
as a decision by the Federal Reserve to cut interest rates by
more than expected rattled the greenback.
 Domestic bond prices finished comfortably higher across the
curve as unorthodox steps by the Fed to grapple with the credit
crisis sparked talk that the Bank of Canada could adopt an even
more aggressive tone than it already has.
 The Canadian dollar closed at C$1.2018 to the U.S. dollar,
or 83.21 U.S. cents, up 2.5 percent from C$1.2317 to the U.S.
dollar, or 81.19 U.S. cents, at Monday's close.
 The bulk of the currency's gain was recorded late in the
session and after the Fed established a target range for
federal funds of zero to 0.25 percent, down from its previous
target of 1 percent.
 The Fed also said it would employ "all available tools" to
dispel a year-long recession, which sparked an intense selloff
in the greenback and opened the door for a sudden surge by the
Canadian dollar.
 The currency rose as high as C$1.1985 to the U.S. dollar,
or 83.44 U.S. cents, late in the session, which marked its
highest level since Nov. 12.
 "Generally the Fed was more aggressive than expected almost
across the board, both in terms of the rate move and the very
aggressive statement of potential further actions," said Doug
Porter, deputy chief economist at BMO Capital Markets. "So we
saw the U.S. dollar take it on the chin ... and this is by no
means exclusive to the Canadian dollar."
 The domestic currency, which rallied 1.6 percent last week,
is up 4 percent this week and is on pace to record its first
back-to-back winning weeks since Nov. 7.
 Early in the session the Canadian dollar had drawn support
from higher oil prices, which rallied on expectations that the
Organization of the Petroleum Exporting Countries would agree
to its biggest supply cut ever when the group meets in Algeria
this week.
 But oil prices turned around to settle 3 percent lower as
nagging worries about shrinking global demand more than offset
expectations that OPEC will agree to supply cuts.
 The main piece of Canadian data for the day showed factory
sales fell 0.5 percent in October from September, in line with
expectations, but its impact on the currency was muted.
 Canadian bond prices took their cue from the bigger U.S.
Treasury market, which finished sharply higher as the Fed said
it would keep its federal funds rate at "exceptionally low
levels for some time." While prices jumped, yields on both
sides of the border fell to record lows.
 The aggressive stance from the Fed also seem to raise the
possibility that the Bank of Canada, which cut its key
overnight rate last week by 75 basis points to 1.25 percent,
could maintain its aggressive position.
 "I think it also raises the possibility of the Bank of
Canada taking on a bit more of an aggressive stance looking
forward as well," said Porter.
 "Probably not to the same extent that we've seen from the
Fed but it at least increases the chances that the Bank of
Canada might do something broadly similar."
 The next Canadian economic data due out will be the October
wholesale trade report on Wednesday, followed by the October
retail sales figures on Thursday and Friday's consumer prices
report for November.
 The two-year bond rose 32 Canadian cents to C$102.80 to
yield 1.294 percent. The 10-year rallied C$1.00 to C$110.65 to
yield 2.950 percent.
 The yield spread between the two-year and 10-year bond was
at 174 basis points, up from 161 basis points at the previous
 The 30-year bond jumped C$1.55 to C$123.35 to yield 3.671
percent. In the United States, the 30-year treasury yielded
2.804 percent.
 (Editing by Rob Wilson)