CANADA FX DEBT-C$ weaker after further BoC warnings on strength

Thu Oct 22, 2009 5:45pm EDT
 
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 * Ends at C$1.0478 to US$, or 95.44 U.S. cents
 * Rebounds from low of C$1.0545 to the U.S. dollar
 * Bank of Canada sounds further warning on risk to growth
 * Bond prices mixed, mirror U.S. Treasury market
 By Cameron French
 TORONTO, Oct 22 (Reuters) - The Canadian dollar ended
slightly weaker on Thursday after the Bank of Canada once again
warned the currency's rally is a risk to growth and discussed
the possibility of intervention.
 But the currency also pared earlier steep losses, as
comments from Governor Mark Carney eased concerns that the bank
might take an even harder line on the currency's appreciation.
 The central bank said earlier this week that the surging
currency was undermining Canada's economic recovery. That
killed thoughts of an early interest rate hike and raised some
concerns the bank might signal it would intervene in foreign
exchange markets.
 Carney told a news conference following the report's
release that intervention in currency market was an option, but
also stressed the bank's main concern was controlling
inflation. [ID:nN22502163]
 The currency briefly spiked lower to C$1.0535, or 94.92
U.S. cents, after the mention of intervention, but almost
immediately pared those losses.
 "The risk leading into the (report) was that Carney would
say something particularly strong about the Canadian dollar, so
I think that markets were concerned with that," said Camilla
Sutton, senior currency strategist at Scotia Capital in
Toronto.
 "I don't think that he hinted that they're anticipating
having to intervene," she added.
 The currency finished at C$1.0478 to the U.S. dollar, or
95.44 U.S. cents, down slightly from C$1.0460 to the U.S.
dollar, or 95.60 U.S. cents, at Wednesday's close.
 The Canadian dollar had hit a session low of C$1.0545 to
the greenback, or 94.83 U.S. cents, before the release of the
report.
 Also weighing on the Canadian dollar were some
disappointing corporate earnings and Chinese data that showed
the economy there rose a weaker-than-expected 8.9 percent in
the third quarter [ID:nSP452724], which reduced investors'
tolerance for risk.
 The Canadian dollar has risen nearly 25 percent since
mid-March, helped by rebounding commodity prices, and by a
steadily retreating U.S. dollar.
 A stronger Canadian currency makes exports more expensive
to foreign buyers, but also makes purchases from foreign buyers
cheaper, which stifles inflation.
 Sutton said she expects the currency's rise to continue,
noting that the past rise had a relatively muted impact on
inflation expectations, meaning the bank may not be too
concerned with further currency gains.
 BONDS FLAT
 Canadian  bond prices ended mixed, largely following the
lead of the U.S. Treasury market as the Bank of Canada's MPR
had little impact on expectations that interest rates will stay
flat well into next year. Yields fell sharply after the Bank of
Canada rate decision on Tuesday.
 "When everything was said and done, their inflation and
growth numbers really didn't change much at all," said Mark
Chandler, fixed income strategist at RBC Capital Markets.
 The two-year bond CA2YT=RR rose 3 Canadian cents to
C$99.50 to yield 1.495 percent, while the 10-year bond
CA10YT=RR fell 13 Canadian cents to C$102.32 to yield 3.463
percent.
 Longer-term Canadian bonds outperformed comparable U.S.
issues. The Canadian 10-year yield was about 3.5 basis points
above its U.S. counterpart, down from 5 basis points on
Wednesday.
 (Reporting by Cameron French; editing by Peter Galloway and
Jeffrey Hodgson)