July 19, 2010 / 9:00 PM / 7 years ago

CANADA FX DEBT-C$ flat ahead of Bank of Canada rate decision

* C$ ends at 94.80 U.S. cents, dips from Friday's close

* Bonds mixed, short bonds rise in safety bid

* Bank of Canada expected to raise key rate on Tuesday (Updates to close)

By Ka Yan Ng

OTTAWA, July 19 (Reuters) - Canada's dollar was little changed versus its U.S. counterpart on Monday as investors were reluctant to take on new risk ahead of Tuesday's Bank of Canada rate decision and its outlook on the economy.

The central bank is widely expected to raise interest rates by 25 basis points to 0.75 percent, but market players are more focused on what the bank will say about Canada's economic prospects, given the uneven global economic recovery. [CA/POLL]

"If there's no verbiage to support further rate hikes don't look for (the Canadian dollar) to strengthen too much," said John Curran, senior vice-president at CanadianForex, a commercial foreign exchange firm.

The Canadian dollar CAD=D4 finished at C$1.0549 to the U.S. dollar, or 94.80 U.S. cents, down from C$1.0546 to the U.S. dollar, or 94.82 U.S. cents, at Friday's close.

Earlier it had fallen as low as C$1.0580, or 94.52 U.S. cents, matching its low point on Friday when it slumped to its weakest level since July 7. It briefly unwound its losses as it tracked U.S. equity prices higher, then settled into a slim range of 25 basis point in the afternoon.

With the recent softening of some U.S. data, including Monday's report showing homebuilder confidence in July was lower than expected, market players will be eager to see how the Bank of Canada's view of the global economy has changed, if at all, and how that will affect Canada's prospects.

Interest rate hikes generally increase demand for a currency due to the possibility of higher returns, but with the uncertain growth outlook the statement that comes along with the rate decision will be key, said Camilla Sutton, currency strategist at Scotia Capital.

"I suspect that the Bank of Canada is going to sound more dovish than the market thinks right now," she said.

"I think that they are going to be increasingly concerned that the Canadian economy has been strong but that, looking ahead, the risks have increased materially -- that it isn't as strong as we get into Q3 and Q4."

While that may lead to further downside in the currency, softness in the U.S. dollar will likely limit the weakness, Sutton said.

SHORT-DATED BONDS RISE

Canadian bond prices were mixed, with short-dated issues gaining as the Toronto Stock Exchange retreated and ahead of Tuesday's Bank of Canada rate announcement.

The two-year bond CA2YT=RR rose 8 Canadian cents to yield 1.524 percent, while the 10-year bond CA10YT=RR fell 10 Canadian cents to yield 3.170 percent.

Canadian bonds outperformed U.S. Treasury issues across the curve. The Canadian 10-year bond was 20.4 basis points above the comparable U.S. bond, versus 23.2 basis points in the previous session.

Volumes were also extremely light, and any moves should not be taken as meaningful signs of overall sentiment, said Sheldon Dong, a fixed income analyst at TD Waterhouse Private Investment.

"I think you just get a lot of uncertainty, indecision, and market volatility on a day-to-day basis. There's just no clear direction at the moment," he said, adding that the Bank of Canada's rate decision was "pretty much baked in."

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, showed the market sees just under a 90 percent likelihood of a July 20 rate hike. BOCWATCH

Earlier on Monday Statistics Canada said that foreigners nearly doubled their purchases of Canadian securities in May from April to a record high C$23.16 billion, buying mainly federal government bonds. [ID:nN19128714]

The May investment was triple the C$8 billion expected, on average, by analysts in a Reuters poll. [ID:nN19128714] (Additional reporting by John McCrank; editing by Rob Wilson)

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