April 21, 2009 / 2:52 PM / 9 years ago

CANADA FX DEBT-C$ falls after Bank of Canada cuts rate

* Bank of Canada cuts rate 25 basis points to 0.25 pct

* C$ dips to 79.96 U.S. cents after rate decision

* Bond prices mostly higher across the curve (Adds details, quote)

By Jennifer Kwan

TORONTO, April 21 (Reuters) - The Canadian dollar weakened against the U.S. dollar on Tuesday morning, touching its lowest level in nearly three weeks, after the Bank of Canada cut its benchmark interest rate to 0.25 percent, but made no explicit promise to take unconventional measures to boost the economy.

The central bank cut its key overnight rate to a historic low of 0.25 percent from 0.50 percent and predicted a deeper recession than it had previously forecast [ID:nN21297335].

It also took the unusual step of providing guidance on rates, saying the overnight rate would stay at 0.25 percent until mid-2010.

“It certainly speaks to the dire situation in the economy,” said Charmaine Buskas, senior economics strategist at TD Securities.

”What struck us was the unprecedented level of transparency that the bank used in this statement in its commitment to keep the overnight rate at 0.25 percent until the second quarter of 2010. That really speaks to just how weak economic conditions are and just how much downside there is for the economy.

The fact that they further downgraded their economic projections also suggests that the Canadian economy is in a “pretty deep recession,” Buskas added.

At 10:20 a.m. (1420 GMT), the Canadian dollar was at C$1.2461 to the U.S. dollar, or 80.25 U.S. cents, down from C$1.2385 to the U.S. dollar, or 80.74 U.S. cents, at Monday’s close.

After the central bank’s announcement, the unit touched C$1.2507 to the U.S. dollar, or 79.96 U.S. cents, its lowest level since April 2.

“The implications, obviously, over the short term are negative for the Canadian dollar in terms of the reaction to the lower interest rates as well as the forecast changes,” said George Davis, chief technical strategist at RBC Capital Markets.

Davis said the market will pay close attention to the central bank’s Monetary Policy Report, due for release on Thursday, when it outlines a framework for unconventional measures, such as buying government or corporate bonds, known as credit or quantitative easing.

BONDS MOSTLY HIGHER

Canadian bond prices were mostly higher across the curve, though the long end was flat, pressured by some concerns the Bank of Canada’s aggressive easing policy could fuel inflation over the long term.

“By keeping rates low, it will certainly ease some of the pressures in terms of lending: it makes borrowing more attractive for both consumers and businesses. The hope is that this will start to spur some economic activity,” said Buskas.

The two-year Canada bond was up 26 Canadian cents at C$100.55 to yield 0.985 percent, while the 10-year bond rose 40 Canadian cents to C$107.90 to yield 2.845 percent.

The 30-year bond was flat at C$123.50 to yield 3.655 percent. In the United States, the 30-year Treasury yielded 3.6502 percent. (Reporting by Jennifer Kwan; editing by Rob Wilson)

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