Canada dollar rises as U.S. rate-hike talk eases

Tue Jun 17, 2008 4:51pm EDT
 
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 * Canadian dollar benefits from weak greenback
 * Thursday's CPI data and Bank of Canada speech in focus
 * Bond prices extend rebound through second session
 By Frank Pingue
 TORONTO, June 17 (Reuters) - The Canadian dollar closed at
its highest level against the U.S. dollar in more than two
weeks on Tuesday as soft economic data dampened expectations of
a U.S. Federal Reserve interest rate cut and rattled the
greenback.
 Domestic bond prices rose across the curve and continued to
reclaim more of the steep losses suffered last week, given the
curbed rate-hike expectations in the United States.
 The Canadian dollar closed at C$1.0171 to the U.S. dollar,
or 98.32 U.S. cents, up from C$1.0225 to the U.S. dollar, or
97.80 U.S. cents, at Monday's close.
 Late in the session the currency rallied to C$1.0168 to the
U.S. dollar, or 98.35 U.S. cents, but could not manage to break
out of the range it has occupied for much of the year.
 Still, it recorded a 0.5 percent gain for the session, its
biggest percent gain in a session since April 21.
 But, just like on Monday, the Canadian currency's rise was
pegged more to a weak greenback after U.S. data and a pair of
media reports prompted some market participants to scale back
expectations for an early Fed rate hike.
 "We really didn't have any interesting news out of Canada
today and certainly the U.S. dollar retreated a little bit for
most of the session so that helped Canada," said Steve Butler,
director of foreign exchange trading at Scotia Capital.
 "It feels to me now like the market is in a bit of a
quandary about what the Fed is going to be doing when they meet
in a week or so."
 The dampened talk of Fed rate hikes came after reports in
Tuesday's Wall Street Journal and Financial Times cited senior
Fed officials who said the U.S. central bank was unlikely to
raise rates in the next few months unless the inflation outlook
worsened.
 Meanwhile, the latest U.S. data showed May's core consumer
prices matched expectations while housing starts decreased,
which added to the downward pressure on the greenback and
opened the door for the Canadian dollar to rally.
 Domestic data showed foreigners purchased C$9.75 billion of
Canadian securities in April, the highest since November 2006,
which gave a mild bid tone to the Canadian dollar.
 Key events in Canada that will be watched closely by market
participants are Thursday's May consumer price index data and
Bank of Canada Governor Mark Carney's speech in Calgary.
 Carney, who will be giving his first speech since the
central bank unexpectedly left its key interest rate steady,
will speak on "Capitalizing on the Commodity Boom: The Role of
Monetary Policy" after markets close on Thursday.
 BOND PRICES HIGHER
 Canadian bond prices benefited from investors who developed
a bigger appetite for more secure assets like government debt
as the idea of U.S. interest rate hikes became less likely.
 The Fed, which has slashed its key federal funds rate since
last year, will set interest rates next week.
 "Bonds are largely reflecting the Fed downplaying market
expectations of near term tightening," said Sal Guatieri,
senior economist at BMO Capital Markets.
 Guatieri also said the weaker data on industrial production
and housing stats offered a bid to the bigger U.S. Treasury
market which carried over into the domestic bond market.
 The two-year bond climbed 18 Canadian cents to C$100.89 to
yield 3.274 percent. The 10-year bond gained 35 Canadian cents
to C$101.23 to yield 3.836 percent.
 The yield spread between the two-year and 10-year bond was
56.2 basis points, up from 51.4 at the previous close.
 The 30-year bond rose 39 Canadian cents to C$113.64 for a
yield of 4.183 percent. In the United States, the 30-year
treasury yielded 4.778 percent.
 The three-month when-issued T-bill yielded 2.70 percent,
down from 2.79 percent at the previous close.