March 18, 2009 / 9:29 PM / 8 years ago

CANADA FX DEBT-C$ hits 2-week high, bonds surge after Fed

* Fed decision to buy long-dated debt boosts C$, bonds

* C$ closes above 80 cents for first time since Feb. 24

* Odds rise that BoC may also try unorthodox measures (Updates to close with further comment, details)

By Ka Yan Ng

TORONTO, March 18 (Reuters) - The Canadian dollar finished above 80 U.S. cents for the first time in more than two weeks on Wednesday and bonds surged after the U.S. Federal Reserve said it would buy longer-term Treasuries.

The Canadian dollar finished sharply higher at C$1.2463 to the U.S. dollar, or 80.24 U.S. cents, against C$1.2688 to the U.S. dollar, or 78.81 U.S. cents, at Tuesday's close. The last time the currency closed above 80 U.S. cents was on Feb. 24.

At one point, the currency rallied as high as C$1.2430 to the U.S. dollar, or 80.45 U.S. cents.

Doug Porter, deputy chief economist at BMO Capital Markets, said the market has "seen no shades of grey" following the Fed's decision to buy up to $300 billion worth of longer-term U.S. government debt and expand purchases of mortgage-related debt to help ease credit market conditions.

The Fed also kept its target for overnight interest rates in a zero to 0.25 percent range. [ID:nN18343369]

"We've seen an absolutely massive rally in bonds, especially at the long end, and that's completely spilled over into Canada. We've also seen the U.S. currency taking it on the chops, mostly against the euro, but it also sagged against the Canadian dollar," Porter said.

Analysts said the Canadian dollar's rally may not last as investors consider the possibility that the Bank of Canada may also wade into nontraditional areas to pump money into the economy through so-called quantitative easing.

Similar moves by central banks elsewhere, such as Switzerland, have hit their currencies as investors fear the potential fallout of big increases in money supply.

With the Fed's decision to buy long-term government debt, the chances of the Bank of Canada adopting some similar measure seem to have risen.

"It probably increases the odds of the Bank of Canada doing some kind of quantitative easing as well. So I'm not sure that the swoon in the (U.S.) dollar versus the Canadian dollar will be sustained for very long," Porter said.

Canada's central bank, whose benchmark interest rates are at a historic low at 0.5 percent, has said it is studying its options and will present a full framework for acting in nontraditional areas in April.

The euro hit a two-month peak against the U.S. dollar on Wednesday, building on strong gains made recently as risk appetite has risen. The U.S. dollar has been treated as the safe-haven currency of choice as the global economy has contracted, but any inkling of positive economic news has tended to give a boost to riskier assets.

Risk aversion has declined of late as optimism on equity markets has risen, and the Canadian dollar has overcome data that has reinforced views that the economy is undergoing a major slowdown.

The market shrugged off news on Wednesday that a plunge in the auto sector helped slash wholesale trade in Canada by a worse-than-expected 4.2 percent in January from December's level. [ID:nN18335629]

BONDS GET INSTANT BOOST AFTER SHOCK FED DECISION

Canadian bonds instantly reversed losses and powered higher as U.S. Treasuries rallied sharply in the wake of the Fed's unexpected move.

Market players had been prepared for the Fed to prolong its consideration of a large-scale purchase of U.S. Treasuries as it had been almost silent about the issue since introducing the possibility in December.

"This thing sort of came out of the blue because initially the bank had talked about it, and then they went strangely quiet about it," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.

"The market was readjusting to a shock announcement more or less. Whoever was shorting bonds basically had to run for cover."

The two-year bond jumped 11 Canadian cents to C$103.02 to yield 0.956 percent. The 10-year bond soared C$2.20 to C$109.30 to yield 2.699 percent.

The 30-year bond drove up C$2.30 to C$126.05 to yield 3.533 percent. The U.S. 30-year bond yielded 3.522 percent.

Canada bonds underperformed U.S. Treasuries across the curve, with the 30-year yield 1 basis point above its U.S. counterpart, compared with 18.2 basis points below on Tuesday. (Reporting by Ka Yan Ng; Editing by Peter Galloway)

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