CANADA FX DEBT-C$ firms in quiet trade, all eyes on BoC tone

Mon Jan 17, 2011 5:38pm EST
 
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   * C$ higher at C$0.9872, or $1.0130
 * Focus on tone of BoC statement, monetary policy
 By Solarina Ho
 TORONTO, Jan 17 (Reuters) - Canada's dollar drifted higher
against the U.S. currency in quiet trading on Monday, with
volumes low due to a U.S. holiday and many investors limiting
bets ahead of the Bank of Canada's rate decision on Tuesday.
 The central bank is widely expected to hold interest rates
at 1 percent, with focus primarily on the tone of the
accompanying statement. [CA/POLL] [ID:nN25118365]
 Some analysts said the central bank may use more hawkish
language to prepare the market for the resumption of interest
rate hikes later this year. Higher rates tend to strengthen a
currency by attracting capital flows.
 "We expect a slightly more hawkish communique, but at the
end of the day, we do continue to think the Bank will be on
hold until July," said Ian Pollick, a portfolio strategist at
TD Securities.
 The currency CAD=D4 stood at C$0.9872 to the U.S. dollar,
or $1.0130, firming from Friday's North American finish of
C$0.9894 to the U.S. dollar, or $1.0107.
 "A lot of that was driven by its performance during the
overnight session where it did trade higher," said George
Davis, chief technical strategist at RBC Capital Markets.
 "We've generally tended to see the Canadian dollar
outperform on the crosses, against the Australian dollar and
the euro, for example. I think that set the tone for today."
 Davis noted that trading was on light volumes, with the
currency firming toward the C$0.9850 area earlier in the
session and weakening toward the C$0.9875 level after the order
flow worked its way through the market.
 The U.S. markets were closed for the Martin Luther King
holiday.
 In addition to the focus on tone of the interest rate
statement, the central bank's quarterly Monetary Policy Report
due out on Wednesday will also be dissected.
 "That will go along way to determine whether or not the
gains we've seen in the Canadian dollar into the new year are
going to be sustained, or whether we get a little bit of a
price correction," said Davis.
 Davis says the market will be keeping an eye on the
C$0.9851 level -- near the 2011 high -- which could be broken
if the Bank of Canada uses a hawkish tone. He said a more
dovish tone could drive the currency toward C$0.9977.
 Canadian bond prices were mostly higher on Monday, though
the interest rate-sensitive two-year bond CA2YT=RR was
unchanged, yielding 1.790 percent. The 10-year bond CA10YT=RR
up 12 Canadian cents, yielding 3.257 percent.  [US/]
 "You really aren't seeing too much movement in any part of
the curve, I think people are sitting with baited breath
waiting for tomorrow," said Pollick.
  (Editing by Jeffrey Hodgson)