CANADA FX DEBT-C$ slips on Europe worries, rate views

Tue May 24, 2011 5:00pm EDT
 
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 * C$ ends down at C$0.9761 to the U.S. dollar, or $1.0245
 * Bond prices rise, outperform U.S. Treasuries
 * Markets reassessing Bank of Canada rate moves
 (Updates to close, adds commentary)
 By Claire Sibonney
 TORONTO, May 24 (Reuters) - Canada's dollar weakened
against the U.S. dollar on Tuesday as fears over European debt
mounted amid a new round of warnings and the market continued
to scale back expectations on Canadian interest-rate hikes.
 The commodity currency shrugged off rising prices for oil
and gold, as concerns about a spreading EU crisis fueled
safe-haven buying. [GOL/] [O/R]
  Europe's policy options to avert a Greek default are
narrowing fast after the ECB and ratings agencies warned
against even voluntary debt rescheduling and Athens
highlighted its urgent need for more EU cash. [ID:nLDE74N0JZ]
 That followed concerns on Monday that a Greek debt default
could drag a new group of countries -- including Group of
Eight member Italy -- into trouble.
 Meanwhile, market participants have gradually revised
their Bank of Canada interest-rate expectations further into
the year on renewed global growth concerns and patchy domestic
data.
 "I think the currency is being weighed on by that old
faithful factor of concerns over Europe and more generally,
there is this broadening view that the Bank of Canada is
likely to lay low for longer than the market previously
thought," said Douglas Porter, deputy chief economist at BMO
Capital Markets.
 With no Canadian data due this week, market players will
have little else to help shape interest-rate expectations
ahead of the Bank of Canada's May 31 policy decision.
 The Canadian dollar CAD=D4 ended the North American
session at C$0.9761 to the U.S. dollar, or $1.0245, down from
C$0.9730 to the U.S. dollar, or $1.0277, at Friday's close.
 Canadian financial markets were shut on Monday for
Victoria Day. The currency on Monday had traded as low as
C$0.9810 to the U.S. dollar, or $1.0194, its lowest in eight
weeks, Reuters data showed.
 RBC Capital Markets on Tuesday became the third primary
dealer in the past week to push back its rate-hike forecast
from July to September, citing the Bank of Canada's recent
concern about developments abroad for the forecast change.
 Mark Chandler, RBC's head of fixed income and currency,
said the decision was mostly prompted by the central bank
expressing more concern about developments abroad and
financial market volatility, as well as the anticipated end of
the U.S. Federal Reserve's quantitative easing program, and
what that might mean for the distribution of risks around
mid-year.
 "We appreciate the message that they've been sending," he
said.
 As North American equities sold off, Canadian bond prices
picked up across the curve, and outperformed their U.S.
counterparts as the domestic market played catch-up following
the long weekend.
 Canada's two-year bond CA2YT=RR rose 2 Canadian cents to
yield 1.589 percent. The 10-year bond CA10YT=RR jumped 35
Canadian cents to yield 3.107 percent.
 Almost no one expects the central bank to hike rates at
its next policy setting on May 31. [CA/POLL]
 (Additional reporting by Ka Yan Ng; Editing by Jan Paschal)