CORRECTED - CANADA FX DEBT-C$ ends flat, election risk grows

Tue Mar 22, 2011 6:07pm EDT
 
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 (Corrects first paragraph to show C$ ended flat at North
American close, 'before' the budget, not 'after')
 * C$ nearly unchanged at $1.0207
 * Currency slips after NDP says it will not support budget
 * Bonds mildly higher across curve
 * Federal budget offers concessions to opposition
 * Domestic data offers mixed view of the economy
 (Adds details)
 By Ka Yan Ng
 TORONTO, March 22 (Reuters) - The Canadian dollar finished
flat against the U.S. currency before the country's minority
Conservative government released its 2011-12 budget on Tuesday
with a host of treats offered to opposition parties in the hope
of avoiding an election.
 But the three opposition parties all said they would vote
against the plan, likely forcing an election in May unless the
Conservatives change the budget.
 The currency CAD=D4 closed at C$0.9799 to the U.S.
dollar, or $1.0205, little changed from its Monday close of
C$0.9797, or $1.0207.
 But it later edged as low as C$0.9815 to the U.S. dollar,
or $1.0188, after the New Democratic Party joined the Liberals
and Bloc Quebecois in rejecting the budget.
 In fiscal plan, the Conservatives pledged to slice the
federal deficit by a quarter this year and return to surplus in
2015. [ID:nCFB004022]
 "All in all, it looks like a budget that's not making major
changes, and certainly not trying to make enemies. The real
test for the Canadian dollar is just the palatability to the
other parties," said Camilla Sutton, chief currency strategist
at Scotia Capital.
  The minority Conservative government looks set to face at
least two parliamentary confidence votes this week and the
chances of it surviving beyond Friday are uncertain at best.
 That could play havoc with the Canadian dollar, which has
been contending with movements in commodity price and
developments in the Middle East, North Africa and Japan.
 "The Canadian dollar has no predictable pattern around
elections. We'll just see how it plays out," said Mark
Chandler, head of Canadian fixed income and currency strategy
at RBC Capital Markets. "There's no reason for markets to get
up in much of an uproar about it."
 Earlier, unexpectedly soft retail sales for January and a
rise in the leading indicator for February offered mixed
signals on the direction of the economy and reinforced
expectations that the Bank of Canada will be in no hurry to
raise interest rates. [ID:nN22151534]
 Primary-dealer forecasts for a rate increase were largely
split between the central bank's May 31 and July 19 policy
announcement dates, according to a Reuters poll last week. But
market pricing remains trained on an October bet.
 [ID:nN18126761]BOCWATCH
 While the retail sales figures may weigh, analysts largely
say the economy can still beat Bank of Canada forecasts for 2.5
percent growth in the first quarter, fed by a jump in wholesale
trade and manufacturing shipments in January and in spite of
benign inflation.
 "With the bank expecting 2.5 percent, that means the output
gap is closing much faster than they were thinking. That does
put the impetus on them to hike rates even if you have
inflation relatively low," said Benjamin Reitzes, an economist
at BMO Capital Markets.
 BONDS HOLD GAINS
 Canadian bond prices were little changed following the
budget, holding gains across the curve as North American stock
markets were slightly softer on the day.
 Ottawa also built a cushion against future financial market
crises into its debt management strategy, proposing to borrow
an additional C$35 billion for a "prudential liquidity" buffer
in case of disruptions in funding markets. [ID:nCFB004026]
 "We had not explicitly accounted for anything like that so
we had expected gross issuance closer to C$70 billion. In terms
of what it means for the market, I think some of shock impact
will be offset because it is going to be somewhat matched with
other assets on the other side," said Chandler.
 He said the the skewing of issuance in the shorter-dated
maturities could push the market towards a flatter curve.
 The two-year bond CA2YT=RR was up 2 Canadian cents to
yield 1.673 percent, while the 10-year bond CA10YT=RR gained
22 Canadian cents to yield 3.190 percent.
 (Editing by Peter Galloway and Rob Wilson)