4 Min Read
* 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)