TORONTO (Reuters) - The Canadian dollar rallied from an early trough on Tuesday, thanks to record high oil prices and a weaker U.S. dollar, but it was not enough to erase the slide recorded after the Bank of Canada cut interest rates.
Domestic bond prices ended higher across the curve as the statement by the Bank of Canada left the door open to further rate cuts.
The Canadian dollar closed at C$1.0080 to the U.S. dollar, or 99.21 U.S. cents, down from C$1.0060 to the U.S. dollar, or 99.40 U.S. cents, at Monday's close.
The currency fell to C$1.0154 to the U.S. dollar, or 98.48 U.S. cents, shortly after the Bank of Canada cut its benchmark interest rate by a half a percentage point to 3.00 percent.
But the loonie recouped a significant portion of the losses as the U.S. dollar stumbled on weak economic data while oil prices surged to a record high near $120 a barrel.
Just after midday, the currency rallied to C$1.0025 to the U.S. dollar, or 99.75 U.S. cents, and then gave back a chunk of the gains in the last half of a roller-coaster session.
A Reuters poll taken last week showed a large majority of primary dealers expected a 50 basis point rate cut, but there was plenty of chatter that the central bank might opt to cut rates by just a quarter point.
"People were wondering whether the Bank of Canada might do something funny and not deliver on their promise, but obviously they did do that," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"The risks going into meeting were that they maybe only go 25 (basis points), so once they delivered we certainly saw a bailout. People knew it was coming but they weren't sure."
In the statement the accompanied its rate announcement, the bank cited "a deeper and more protracted slowdown in the U.S. economy" as the main threat to the Canadian economy, and as the reason it may have to ease rates more in the future.
It next scheduled rate announcement is June 10, and most primary dealers expect the key rate to be lowered another 25 basis points. The bank has cut rates by 150 basis points since December.
The Bank of Canada releases its Monetary Policy Report on Thursday and the market will be watching closely for details on the bank's assessment of the economy.
Bond prices finished higher as commentary from the Bank of Canada convinced some dealers to hang on to secure assets like government debt.
The bank did say that additional rate cuts are likely to be needed, but it also left open the possibility of a pause in its easing cycle as it assesses the fallout from global economic woes before its next rate announcement.
"In our view they are signaling that they are approaching the end of this cycle," said Michael Gregory, senior economist at BMO Capital Markets.
"But to the extent that they have not closed the door completely to further rate cuts ... (that) must still be encouraging for the bond market."
The two-year bond rose 7 Canadian cents to C$101.92 to yield 2.803 percent. The 10-year bond increased 20 Canadian cents to C$102.77 to yield 3.639 percent.
The yield spread between the two- and 10-year bonds was 83.6 basis points, up from 82.9 basis points at the previous close.
The 30-year bond eked out a gain of 2 Canadian cents to C$114.82 to yield 4.121 percent. In the United States, the 30-year treasury yielded 4.445 percent.
The three-month when-issued T-bill yielded 2.52 percent, down from 2.55 percent at the previous close.