Canada dollar hit by Bank of Canada's dovish tone

Tue Oct 21, 2008 10:44am EDT
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

 * Bank of Canada cuts key rate 25 basis points to 2.25 pct
 * Central bank signals more rate cuts likely
 * Bonds rally after rate cut and slide in Toronto stocks
 By Frank Pingue
 TORONTO, Oct 21 (Reuters) - The Canadian dollar was stuck
lower versus the U.S. dollar on Tuesday as the Bank of Canada
cut its key overnight rate and issued a dovish statement that
suggested more rate cuts will likely be needed.
 Bond prices were higher across both ends of the curve as
the likelihood of further Bank of Canada rate cuts and a slide
in equity markets sparked demand for secure government debt.
 At 10:30 a.m. (1430 GMT), the Canadian unit was at C$1.2081
to the U.S. dollar, or 82.77 U.S. cents, down from C$1.1937 to
the U.S. dollar, or 83.77 U.S. cents, at Monday's close.
 The Bank of Canada's decision to lower its key rate by 25
basis points was less than the 50-basis-point cut that many of
Canada's primary securities dealers had expected, but the tone
of the statement was enough to keep the Canadian dollar down.
 "What the market is really keying in on is the overt dovish
sentiment that's been delivered in the communique," said Jack
Spitz, managing director of foreign exchange at National Bank
of Canada.
 "Nothing about the communique that I can see suggests that
the bank is looking at anything other than potentially cutting
rates going forward."
 In the statement that accompanied the bank's announcement,
it slashed its projections for economic growth and inflation
given the global economic downturn, financial markets in stress
and a fall in commodity prices.
 The rate cut, which follows the unexpected 50-basis-point
cut on Oct. 8 in a coordinated move with other central banks to
help calm ailing financial markets, leaves the bank's key rate
at 2.25 percent.
 The Canadian dollar did get a short-lived boost to C$1.2023
to the U.S. dollar, or 83.17 U.S. cents, immediately after the
rate announcement since it was less than the heftier 50-point
cut many had been anticipating.
 But the gain was quickly wiped out as the market started to
sift through the details of the bank's statement. The Bank of
Canada will offer its projection for the economy and inflation
when it releases its Monetary Policy Report on Oct. 23.
 Lower oil prices were also weighing on the Canadian dollar
since Canada is a key supplier of oil to the United States and
its currency is often influenced by the price of crude.
 BOND PRICES RALLY
 Canadian bond prices all rose given a favorable environment
for government debt due to a sharp early selloff in equities
and the likelihood of more rate cuts in Canada.
 Bond prices were hovering around the break-even level early
in the morning but eventually all moved higher across the curve
after the Bank of Canada cut its overnight lending rate to its
lowest level since September 2004.
 The Toronto Stock Exchange's main index fell nearly 3
percent at the open before bouncing back for a loss of about 1
percent by mid-morning.
 The Canadian overnight Libor rate LIBOR01 was 2.6250
percent, down from 3.0000 percent on Friday.
 Monday's CORRA rate CORRA= was 2.5058 percent, up from
2.5011 percent on Friday. The Bank of Canada publishes the
previous day's rate at around 9 a.m. daily.
 The two-year bond was up 2 Canadian cents at C$101.16 to
yield 2.183 percent. The 10-year bond increased 3 Canadian
cents to C$104.30 to yield 3.713 percent.
 The yield spread between the two-year and the 10-year bond
moved to 153 basis points from 157 basis points at the previous
close.
 The 30-year bond rose 5 Canadian cents to C$112.90 to yield
4.219 percent. In the United States, the 30-year Treasury
yielded 4.243 percent.
 (Editing by Peter Galloway)