CANADA FX DEBT-C$ slumps ahead of BoC rate decision

Mon Oct 18, 2010 8:33am EDT
 
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 * C$ falls to 97.80 U.S. cents
 * Bonds prices up across curve
 By Claire Sibonney
 TORONTO, Oct 18 (Reuters) -  The Canadian dollar fell more
than a penny against the U.S. dollar on Monday, losing sight of
parity as the greenback rallied and investors cautiously
awaited a Bank of Canada interest rate decision.
 While the market is pricing in a near certainty that the
central bank will hold its overnight target rate at 1.0 percent
on Tuesday, the tone of its statement will be closely followed
for further direction. [ID:nN15144891]
 "Canada is one of the weakest performing majors today so I
would suspect it's a little bit of a positioning shift or
short-covering in dollar/Canada ahead of that uncertainty in
the bank decision tomorrow," said Sacha Tihanyi, currency
strategist at Scotia Capital.
 "Obviously things are not going stupendously in the U.S.
economy and as such the bank could highlight not just the
uncertainty it has highlighted in the past but the drag that's
been exerted on Canada by the U.S. as a constraining factor for
monetary policy going forward."
 Ahead of Tuesday's statement and the central bank's
Monetary Policy Report on Wednesday, many forecasters expect
the central bank to stay pat on rates until 2011.
 U.S. DOLLAR RALLIES
 South of the border, the U.S. dollar bounced back from a
10-month low against a basket of currencies, as investors
trimmed bearish bets on the greenback on uncertainty over how
far the Federal Reserve will go in easing monetary policy.
  The expectation of quantitative easing by the Fed --
essentially creating new money to buy assets -- had recently
been driving the U.S. dollar lower and higher-yielding
currencies, such as Canada's, higher.
 As a result, both the Canadian dollar and Australian dollar
-- Canada's sister commodity currency -- pierced through parity
against the greenback last week.
 At 8:10 a.m. (1210 GMT), the Canadian dollar stood at
C$1.0225 against the U.S. dollar, or 97.80 U.S. cents, down
from Friday's finish at C$1.0118 to the U.S. dollar, or 98.83
U.S. cents.
 Tihayni said he was eyeing C$1.0234 as a "topside
resistance for dollar/Canada." If that technical level is hit,
that could bring further weakness in the Canadian currency, to
around C$1.0350 against the U.S. dollar.
 With riskier assets in decline, prices of Canadian
government debt were stronger across the curve.
 The two-year bond CA2YT=RR was up 2 Canadian cents to
yield 1.423 percent, while the 10-year bond CA10YT=RR gained
12 Canadian cents to yield 2.779 percent.
 (Reporting by Claire Sibonney; Editing by Theodore d'Afflisio)