Canadian dollar flat as market awaits BoC outlook
* Canadian dollar sticks to tight range in overnight trade
* Bank of Canada Monetary Policy Report Update in focus
* Bond prices higher on central bank dovishness
By Frank Pingue
TORONTO, July 16 (Reuters) - The Canadian dollar was little changed versus the U.S. dollar on Wednesday as traders took a breather ahead of the Bank of Canada Monetary Policy Report Update, which may expand on the bank's economic outlook.
Domestic bond prices were slightly higher across the curve as mounting concerns about the U.S. financial sector's health kept secure assets like government debt in demand.
At 8:05 a.m. (1205 GMT), the Canadian unit was at C$1.0024 to the U.S. dollar, or 99.76 U.S. cents, down from C$1.0023 to the U.S. dollar, or 99.77 U.S. cents, at Tuesday's close.
The move paled in comparison to the currency's rally in the previous session when it reached a six-week high as growing fears about the state of the U.S. financial system took its toll on the U.S. dollar.
Tuesday's session also included a sharp fall in global stock markets, a grim assessment of the U.S. financial sector from Federal Reserve Chairman Ben Bernanke and the Bank of Canada's announcement to leave interest rates steady.
"I think after all the activity yesterday there wasn't really much to really move the markets overnight," said George Davis, chief technical strategist at RBC Capital Markets.
"So after everything that happened yesterday ... I think the market is basically just pausing here and trying to catch its breath and sort of digest everything that's gone on."
Also keeping the Canadian dollar in a tight range was a mild drop in oil prices compared with the much steeper drop in the previous session when prices fell more than $6 a barrel.
Canada is a major exporter of oil, but its currency's link with oil prices has diminished considerably this year compared with last year when skyrocketing oil prices backed its rise.
Barring a sudden turn of events, the Canadian currency may stick to a tight range in Wednesday's session as traders bide their time until the Bank of Canada Monetary Policy Report Update and press conference on Thursday.
Traders will be looking for more information regarding the bank's statement on Tuesday that said Canadian inflation could spike above 4 percent next year for the first time since 2003.
BOND PRICES ALL HIGHER
Canadian bond prices were higher across the curve as a rally in the bigger U.S. Treasury market spilled north of the border, but the domestic market's move underperformed its U.S. counterpart.
The rise in U.S. treasuries was being fueled partly by lowered expectations for Fed interest rate hikes this year given the nagging economic concerns in the United States.
"A combination of financial market fears and central bank dovishness is causing central bank expectations really to be scaled quite sharply back," said Eric Lascelles, chief economics and rates strategist at TD Securities.
The two-year bond was up 2 Canadian cents at C$101.26 to yield 3.050 percent. The 10-year bond climbed 3 Canadian cents to C$104.70 to yield 3.677 percent.
The yield spread between the two-year and 10-year bond was 62.7 basis points, up from 61.5 basis points, unchanged from the previous close.
The 30-year was up 12 Canadian cents at C$115.87 for a yield of 4.061 percent. In the United States, the 30-year treasury yielded 4.468 percent.
The three-month when-issued T-bill yielded 2.27 percent, down from 2.27 percent at the previous close. (Editing by Scott Anderson)
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