Canadian dollar ends down ahead of likely rate cut

Mon Oct 20, 2008 4:28pm EDT
 
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 * Canadian wholesale trade falls more than expected
 * Focus on Tuesday's Bank of Canada rate announcement
 * Short-end bond prices up ahead of rate announcement
 By Frank Pingue
 TORONTO, Oct 20 (Reuters) - The Canadian dollar fell versus
the U.S. dollar on Monday as a looming Bank of Canada rate cut
on Tuesday coupled with comments from Federal Reserve Chairman
Ben Bernanke to shake the currency off its early gains.
 Canadian bond prices closed higher across the curve after
data showed wholesale trade dropped more than expected in
August, but the gains were contained due to a rally on North
American equity markets.
 The Canadian dollar closed at C$1.1937 to the U.S. dollar,
or 83.77 U.S. cents, down from C$1.1869 to the U.S. dollar, or
84.25 U.S. cents, at Friday's close.
 The U.S. dollar rallied around comments Bernanke made to
Congress, where he endorsed another stimulus plan for the
sluggish U.S. economy, which would ultimately reduce pressure
on monetary policy to provide stimulus for the economy.
 Another drag on the Canadian currency was uncertainty as to
the size of the widely expected Bank of Canada rate cut, with
most of Canada's primary securities dealers expecting either a
25-basis-point cut or a 50-basis-point cut to the key rate.
 "I guess (Bernanke's) encouragement of another fiscal
stimulus package is supporting supporting the greenback," said
Sal Guatieri, senior economist at BMO Capital Markets.
 "And I guess there is some uncertainty about whether the
bank will go a full 50 basis points instead of just 25, so that
could be weighing on the (Canadian) currency as well."
 During the overnight session, the Canadian currency had
rallied to C$1.1740 to the U.S. dollar, or 85.18 U.S. cents, a
move credited largely with a rally in the price of oil, which
is a key Canadian export.
 But the gains made from Friday's close vanished early in
the North American session, and further significant moves were
not expected until after the Bank of Canada makes its scheduled
rate announcement Tuesday at 9:00 a.m. (1300 GMT).
 The bank's key rate is 2.50 percent after its unexpected
50-basis-point cut on Oct. 8 in a coordinated move with other
central banks to help calm ailing financial markets.
 BOND PRICES RALLY
 Canadian bond prices moved higher across the both the short
and long end of the curve, garnering interest mostly after
Canadian wholesale trade data showed a steeper-than-expected
1.5 percent drop in August from July.
 Uncertainty heading into the Bank of Canada's Tuesday rate
decision, which will be accompanied by a statement that could
shed light on the bank's economic outlook, also helped whet
dealer's appetites for bonds,
 "Another thing that's probably boosting bonds is the
speculation the bank will go 50 (basis) points," said Guatieri.
"But if they just go 25 (basis points) as we anticipate, that
would hurt the bond market."
 The two-year bond was rose 15 Canadian cents to C$101.13 to
yield 2.198 percent. The 10-year bond increased 7 Canadian
cents to C$104.27 to yield 3.716 percent.
 The yield spread between the two-year and the 10-year bond
moved to 157 basis points from 123 basis points at the previous
close.
 The 30-year bond rose 25 Canadian cents to C$112.85 to
yield 4.221 percent. In the United States, the 30-year Treasury
yielded 4.243 percent.
 (Editing by Peter Galloway)