REFILE-CANADA FX DEBT-C$ drifts higher with Fed in focus

Wed Jan 26, 2011 8:20am EST
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  (Fixes typo in strategist's name in 10th paragraph)
 * C$ rises to $1.0039
 * Bond prices drift lower across curve
 By Claire Sibonney
 TORONTO, Jan 26 (Reuters) - The Canadian dollar firmed
against its U.S. counterpart on Wednesday, benefiting alongside
other riskier assets after a promise of spending cuts from U.S.
President Barack Obama cemented expectations the Fed will
maintain its ultra-loose monetary policy.
 Obama's State of the Union speech late on Tuesday, which
also signaled corporate tax cuts, came ahead of the U.S.
central bank's latest policy decision, due around 2:15 p.m.
(1915 GMT). [ID:nN2539641]
 In the aftermath of the speech, world stocks and commodity
prices rallied, while the U.S. dollar weakened broadly as
investors expected the Fed to sound optimistic even as it
reaffirms its plan to buy $600 billion in government debt.
 "Seeing there's a bit more risk sentiment generally today
that's probably driving the Canadian dollar,"  said Charles
St-Arnaud, Canadian economist and currency strategist at Nomura
Securities International in New York.
 "Canada will benefit because fundamentals in Canada are
slightly better, especially on the fiscal side."
He added that a perceived stabilization of sovereign debt
concerns in Europe is also contributing to a more positive
global economic outlook.
  "Investors are a bit more willing to take risk, so that
brings slightly higher commodity price ... and that obviously
is pushing the Canadian dollar higher."
 With no Canadian data out for the rest of the week,
investors will take their cues from south of the border, which
include new U.S. home sales data, with the health of the
housing market is seen as key to the U.S. economic recovery.
 At 8 a.m. (1300 GMT), the currency CAD=D4 was worth
C$0.9961 to the U.S. dollar, or $1.0039, slightly stronger than
Tuesday's North American close at C$0.9976 to the U.S. dollar,
or $1.0024.
 Still hovering around parity against the greenback, the
currency's gains will be held in check by a cautious Bank of
Canada, said St-Arnaud.
 "With comments from the Bank of Canada last week that our
persistently strong Canadian dollar and weak competitiveness
have been affecting the economy ... we can see the Canadian
dollar appreciate but not by a lot over the next few
 Canadian government bond prices declined across the curve,
tracking U.S. Treasuries, as they handed back some gains from a
rally the previous day.
  The two-year bond CA2YT=RR was off 3 Canadian cents to
yield 1.699 percent, while the 10-year bond CA10YT=RR slipped
18 Canadian cents to yield 3.303 percent.
  (Reporting by Claire Sibonney, Editing by Chizu Nomiyama)