CANADA FX DEBT-C$ weakens after Bank of Canada hikes rates

Tue Jul 20, 2010 10:07am EDT
 
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 * C$ softer at 94.57 U.S. cents
 * Bond prices gain across curve
 (Updates with Bank of Canada rate decision)
 By Claire Sibonney
 TORONTO, July 20 (Reuters) - The Canadian dollar fell
slightly against its U.S. counterpart on Tuesday morning after
the Bank of Canada raised its key interest rate but warned that
economic recovery at home and abroad will be slower than
thought, foreshadowing a more hesitant pace of rate hikes from
now on.
  Last month, the bank became the first in the G7 advanced
economies to raise rates from the emergency lows introduced
during the global economic crisis. It took a second step on
Tuesday by lifting borrowing costs by another 25 basis points
to 0.75 percent, a move unanimously predicted by Canada's
primary securities dealers. [ID:nN20251478]
 But the bank also cut its growth forecast for Canada for
this year and said Europe's efforts to reduce sovereign debt
would temper the global recovery as well.
 "It looks like all that fiscal retrenchment coming down the
pipeline in Europe and eventually in the United States will
dampen the economic outlook externally and that, of course, has
implications for Canada," said Sal Guatieri, senior economist
at BMO Capital Markets.
 "I would not expect pronounced weakness (in the Canadian
dollar), but it is certainly in line with the view that the
Bank of Canada might not raise interest rates at every
subsequent meeting over the next year."
 Higher rates typically help a currency by attracting
capital flows, but investors said that effect has been priced
in.
 The Canadian dollar was already skewed to the downside
ahead of the rate decision as risk aversion seeped back into
global markets following a string of disappointing U.S.
earnings news.
 At 9:37 a.m. (1337 GMT), the Canadian dollar CAD=D4 was
at C$1.0574 to the U.S. dollar, or 94.57 U.S. cents, down
slightly than Monday's finish of C$1.0549 to the U.S. dollar,
or 94.80 U.S. cents.
  Earlier in the session, the Canadian dollar CAD=D4
touched a low of C$1.0587 against the greenback, or 94.46
cents, its weakest level since July 7, but market watchers said
the impact on the currency should be limited.
 Short-term money market rates rose after the tightening,
but bond yields mostly fell. The yield on the two-year Canadian
government bond CA2YT=RR fell to 1.48 percent from 1.514
percent just before the news.
  "I think the markets were widely expecting a dovish
commentary. It may result in some modest further rallying in
the bond market," said Sheryl King, chief Canadian economist at
Banc of America-Merrill Lynch.
 The 10-year bond CA10YT=RR extended gains, with the yield
falling to 3.111 percent from 3.158 just before the rate
announcement.
 (Additional reporting by John McCrank and Euan Rocha; editing
by Peter Galloway)