CANADA FX DEBT-C$ extends losses on dovish BoC statement

Tue Jan 18, 2011 1:00pm EST
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   * C$ at C$0.9927, or $1.0074
 * Bank of Canada holds rate steady at 1 percent
 * Short-term yields fall after Bank of Canada statement
 (Updates with details, comments)
 By Solarina Ho
 TORONTO, Jan 18 (Reuters) - Canada's dollar extended losses
against the greenback on Tuesday after the cental bank used
more dovish-than-expected language in its much anticipated
decision to keep interest rates steady at 1 percent.
 The Bank of Canada held its overnight lending target steady
for the third straight time after raising rates three times
between June and September 2010. [ID:nN18290983]
 At the same time it toughened its language on the harmful
effects of the strong Canadian dollar on the recovery, noting
the currency helped drive the country's current account deficit
to a 20-year high.
 A strong currency can act as a brake on growth in an
export-oriented country such as Canada.
 "The biggest driver today was the Bank of Canada statement
and the fact that it was less hawkish than a lot of people were
expecting," said Jacqui Douglas, currency strategist at TD
 "If you look at CAD on the crosses, even, it's
underperforming all the major currencies today, so this really
does seem to be a Canada-specific issue."
 At 12:26 p.m. (1726 GMT), the Canadian dollar CAD=D4 was
at C$0.9927 to the U.S. dollar, or $1.0074. The currency was at
C$0.9867, or $1.0135, just before the central bank's decision.
 Overnight, it hit a 2-1/2 year high of C$0.9837 against the
U.S. dollar, with some traders betting on more hawkish language
in the statement.
 "It seems like markets may be getting a little
uncomfortable with how low USD/CAD has been heading and may
want to rethink that value for the Canadian dollar now that the
Bank of Canada looks like it's on hold for a while still," said
 The Bank of Canada nudged up economic growth forecasts for
2011 and 2012 to reflect the strength of the global economic
recovery, but said that further reductions in its monetary
policy stimulus would need to be carefully considered.
 "I would think it would push off some of the bets in the
market that the Bank of Canada is going to hike (rates) sooner
rather than later, so I would expect a bit of the tone in the
market to ease up on the Canadian dollar," said Derek Holt, an
economist at Scotia Capital.
 Overnight index swaps, which trade based on expectations
for the key central bank rate, showed investors see an 83.23
percent probability rates will stay on hold March 1, compared
with 72.85 percent before the statement. BOCWATCH
 Canadian government T-bill and bond yields fell immediately
after the rate announcement, reflecting a scaling back of rate
hike expectations.
 But bond yields later reversed those declines, mirroring
weakness in U.S. Treasury prices. Traders said a large sale of
long-dated U.S. bonds pushed the market into the red and
sparked a broader wave of selling. [US/]
 The yield on the rate-sensitive two-year Canadian
government bond CA2YT=RR was 1.793 percent, little changed
from before the statement. The 10-year bond was down 35
Canadian cents to yield 3.30 percent. <0#CABMK=>
 (Editing by Jeffrey Hodgson)