CANADA FX DEBT-C$ ends lower as Bernanke undercuts rally

Tue Jul 21, 2009 4:31pm EDT
 
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 * Fed comments knock C$ from near six-week high
 * C$ unravels gains made after BoC rate decision
 * Bond prices end mostly higher after early selloff
 (Recasts)
 By Frank Pingue
 TORONTO, July 21 (Reuters) - Canada's dollar closed lower
versus the greenback on Tuesday as a cautious assessment of the
U.S. economy by Federal Reserve Chairman Ben Bernanke yanked it
from the near six-week high it charged to after a more
optimistic statement from the Bank of Canada.
 The abrupt turnaround in the currency coincided with
Bernanke's sobering remarks on the U.S. economy during
testimony before the House Financial Services Committee.
[ID:nWEQ001226]
 The comments offered a boost to the U.S. dollar due to its
safe-haven appeal and forced the Canadian dollar to relinquish
the gains it made after the Bank of Canada softened the hard
tone it had taken toward a surge in the currency last month.
 Bernanke said U.S. unemployment was likely to remain high
into 2011, which he warned could undermine consumer confidence
and derail an economic recovery.
 "I would clearly give the credit to Mr. Bernanke," Steve
Butler, director of foreign exchange trading at Scotia Capital,
said when asked to explain the slide in the Canadian dollar.
 "Just the whole idea that (U.S.) rates will stay low for a
long period of time I guess diffuses some of the hope that
things were coming along faster than we were expecting."
 The Canadian dollar closed at C$1.1071 to the U.S. dollar,
or 90.33 U.S. cents, down from C$1.1068 to the U.S. dollar, or
90.35 U.S. cents, at Monday's close.
 Earlier in the session the Canadian currency rallied to
C$1.0965 to the U.S. dollar, or 91.19 U.S. cents, which was its
highest level since June 11.
 The move higher came after the Bank of Canada stuck to its
conditional pledge and left its key interest rate steady at the
historic low of 0.25 percent. [ID:N21196742]
 Also driving the gain were comments the central bank made
in its statement that a stronger currency and industrial
restructuring were "significantly moderating the pace of
overall growth". Those words were softer than the bank's June
statement, when it said the "unprecedentedly rapid rise" in the
currency could "fully offset" positive factors.
 The bank's statement also included a rosier economic
outlook, including a forecast that the economy will shrink by
2.3 percent in 2009, not the 3.0 percent it forecast in April;
and will grow by 3.0 percent in 2010 rather than the 2.5
percent it had forecast earlier.
 "I think the market was expecting some more forceful
language with respect to the currency, which was not received,"
said Jack Spitz, managing director of foreign exchange at
National Bank Financial.
 "So it opened the door just a bit more in terms of the
acquiescence from the bank with respect to Canadian dollar
appreciation, and the immediate price action tells the story."
 The Canadian dollar is up about 18 percent since it tumbled
to a four-year low of C$1.3066 to the U.S. dollar, or 76.53
U.S. cents, in early March.
 BOND PRICES MOSTLY HIGHER
 Canadian bond prices rallied off early lows to end the
session higher across most of the curve as Bernanke's comments
gave a bid to secure government debt.
 The bounce in Canadian bonds largely followed the surge in
the bigger U.S. Treasury market after Bernanke cautioned about
economic weakness.
 "Bernanke's comments reaffirmed that we should not expect
rate hikes for quite some time and he dampened inflation
expectations by suggesting it should be no problem for the Fed
to mop up the excess liquidity in due time," said Sal Guatieri,
senior economist BMO Capital Markets.
 Guatieri also said Bernanke's warning that American
consumer spending is at risk due to large job losses and
falling home prices supported the bond market as well.
 The two-year Canada bond ended up 6 Canadian cents at
C$100.11 to yield 1.189 percent, while the 10-year bond rose 15
Canadian cents to C$102.75 to yield 3.407 percent.
 The 30-year bond moved off its earlier low but still ended
lower, down 5 Canadian cents at C$117.30 to yield 3.968
percent. The 30-year U.S. Treasury bond yielded 4.389 percent.
 Canadian bonds underperformed their U.S. counterparts
across most of the curve. The Canadian 30-year bond was about
42 basis points below the U.S. 30-year yield, compared with 55
basis points on Friday.
 (Editing by Peter Galloway)