CANADA FX DEBT-C$ drops as dovish BoC holds rates, cuts outlook
* C$ touches as low as 96.39 U.S. cents
* Bank of Canada hold key rate steady at 1 pct
* Monetary Policy Report due Wednesday
* Bond prices rise on rate pause expectations (Updates to close of North American market, adds quotes)
By John McCrank
OTTAWA, Oct 19 (Reuters) - Canada's dollar tumbled more than 2 cents against the U.S. currency on Tuesday to touch a near four-week low after the Bank of Canada halted its rate hike campaign and surprised markets with the dovishness of its language.
The currency CAD=D4 bottomed out at C$1.0374 to the U.S. dollar, or 96.39 U.S. cents, its lowest level since Sept. 23, before recovering some of those losses. On Monday, it finished at C$1.0141, or 98.61 U.S. cents.
The Bank of Canada kept its benchmark interest rate unchanged at 1 percent, as expected. It also slashed it domestic growth forecasts for 2010 and 2011 citing the generally tepid pace of the global economic recovery, especially in the United States. [ID:nN19118876] For full text, please see: [ID:nN19118393]
The central bank, which raised rates three times starting in June, also said inflation would be softer than expected.
"The statement is very clear," said Camilla Sutton, a currency strategist at Scotia Capital in Toronto. "It's more dovish than the street expected and in term of effects, it significantly pushes out the expectations for interest rates in Canada."
The prospect of higher interest rates tends to help currencies strengthen because they often attract capital flows. Just last week the currency traded one-for-one with the U.S. dollar for the first time since April, partly because Canadian rates are higher than U.S. rates in most maturities.
A Reuters poll on Tuesday showed that all of Canada's primary securities dealers expect the central bank to keep interest rates steady at its next decision in December. Only a minority saw rates rising in the first quarter of next year. [ID:nN19139203] [CA/POLL]
The Canadian dollar ended the North American session at C$1.0319 to the U.S. dollar, or 96.91 U.S. cents.
Canada's dollar weakened even before the Bank of Canada decision. It fell after China's central bank surprised the market with its first rate hike in nearly three years, reflecting concerns over rising domestic asset prices and stubborn inflation. [ID:nTOE63E07V]
The greenback strengthened on a safe-haven bid after China's move, as investors feared the higher rates would dampen growth in China and temper its massive appetite for commodities. [FRX/] [ID:nBJI002412]
U.S. crude oil future prices fell more than $2, while gold and base metals prices also faltered. [O/R] [GOL/] [MET/L]
Market players dumped the euro and sold off commodity-sensitive currencies such as the Australian dollar. Canada is a commodity-rich country, and its currency is often affected by moves in their prices.
"Canada had everything work against it, I mean, there was the Bank of Canada, China's news, as well as the broader move in the U.S. dollar all worked against it," said Sutton.
On Wednesday, the Bank of Canada takes center stage again with the release of its Monetary Policy Report, which will flesh out its thinking on policy going forward.
BOND PRICES RISE
Canadian government debt prices were higher as rate hike expectations diminished and the outlook for economic growth dimmed, said Fergal Smith, managing market strategist at Action Economics.
"The front of the curve and the belly of the curve have outperformed because they're more sensitive to the Bank of Canada's policy trajectory," Smith said.
The two-year bond CA2YT=RR climbed 14 Canadian cents to yield 1.348 percent. It yielded 1.426 percent before the announcement. The 10-year bond CA10YT=RR rose 40 Canadian cents to yield 2.712 percent, compared with 2.775 percent just before the rate decision.
Canadian bonds outperformed across much of the curve, with the 10-year yield narrowing to 22.5 basis points over its U.S. counterpart from 24.3 basis points on Monday. (Additional reporting by Jennifer Kwan, Ka Yan Ng and Claire Sibonney; editing by Jeffrey Hodgson)
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