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