CANADA FX DEBT-C$ firms on equities, oil; dovish BoC boost bonds

Tue Jul 20, 2010 1:32pm EDT
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   * C$ at C$1.0493 to U.S. dollar, or 95.30 U.S. cents
 * Bond prices rise after dovish BoC statement
 (Updates to afternoon)
 By Claire Sibonney
 TORONTO, July 20 (Reuters) - The Canadian dollar
strengthened on Tuesday, taking its cue from recovering equity
and commodity markets, after the Bank of Canada's interest rate
hike initially failed to attract more bids for the currency.
 North American indexes rebounded from session lows and oil
rose ahead of weekly inventory reports expected to show crude
supplies fell last week, driving the commodity-linked currency
CAD=D4 to touch a session high of C$1.0480 to the U.S.
dollar, or 95.42 U.S. cents. [.N] [O/R]
 Working against the currency, the country's central bank
warned that economic recovery at home and abroad will be slower
than thought, foreshadowing a more hesitant pace of rate hikes
from now on. [ID:nN20251478]
 "If it was not for the price of oil increasing, we could
have seen a small decrease in the Canadian dollar," said Yanick
Desnoyers, economist at National Bank Financial in Montreal.
  The bank last month became the first in the Group of Seven
advanced economies to raise rates from the emergency lows
introduced during the global crisis. It took a second step on
Tuesday by lifting borrowing costs another 25 basis points to
0.75 percent.
 Canada's blistering growth rate and jobs growth had led
primary securities dealers to unanimously predict another rate
hike, putting Canada leagues ahead of the U.S. Federal Reserve
and other G7 central banks who are not yet ready to end the era
of easy money.
 "We were a bit surprised by the fact that they did not
address the strength of the labor market. Actually, we are the
only G7 country where the employment level is now around its
pre-recession one," added Desnoyers.
 "There was a lack of conviction clearly in this press
release ... but we still think that domestic developments
should be strong enough going forward."
 At 1:12 p.m. (1712 GMT), the Canadian dollar CAD=D4 was
at C$1.0493 to the U.S. dollar, or 95.30 U.S. cents, up from
Monday's finish of C$1.0549 to the U.S. dollar, or 94.80 U.S.
 After the bank's rate announcement, the currency had
initially weakened.
 "Markets are a little lost in the sense that there are
other concerns," said Carlos Leitao, chief economist at
Laurentian Bank of Canada, in Montreal.
 "This decision had been totally anticipated so it was no
surprise and the focus is still on what is going on in the
United States."
 U.S. housing starts hit their lowest level in eight months
in June, data on Tuesday showed, further evidence the economy
lost momentum in the second quarter, but a rise in permits
offered hope of a pick up in homebuilding. [ID: nN20249501]
 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 dropped to 1.490 percent from 1.514
percent just before the news.
  "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 Bank of America
Merrill Lynch.
 The 10-year bond CA10YT=RR extended gains, with the yield
falling to 3.149 percent from 3.158 just before the rate
 (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)