CANADA FX DEBT-C$ pares some losses after Fed; NDP support eyed
* C$ at C$0.9542, or $1.0480, still off Tuesday's finish
* Fed signals no rush to scale back US economic support
* Markets wary as NDP surges to second place in polls
* Three-year bond auction meets with solid demand
By Solarina Ho
TORONTO, April 27 (Reuters) - Canada's currency recovered some losses against the U.S. dollar on Wednesday after the U.S. Federal Reserve said it would keep rates exceptionally low for an extended period.
The Federal Open Market Committee said it planned to complete its $600 billion bond buying program in June as scheduled. It also noted that the economy was recovering at a moderate pace, despite some headwinds. [ID:nN26291565]
The overall statement was in line with expectations. The market will be keen to dissect comments from Fed chairman Ben Bernanke at 2:15 p.m. ET (1815 GMT) for further clues to the monetary policy plans in the U.S.
"If anything, the (FOMC) comments sounded slightly softer on the economy and there's no reason to think the Fed's moving anytime soon on interest rates. Canada's done a little bit better since then, but really that not outside what we've seen in other currencies as well," said Shane Enright, executive director, foreign exchange sales at CIBC.
"The market positioning is certainly short-U.S. dollar, not only against Canada, but across all the currencies right now."
The U.S. central bank is lagging other countries in tightening its monetary policy. The European Central Bank and China have both taken steps to cool their economies and the Bank of Canada is widely expected to raise interest rates as early as this summer. [CA/POLL]
The U.S. reluctance to take a more hawkish stance has undercut the U.S. dollar, which slid to a three-year low against a broad basket of currencies on Wednesday. [FRX/]
At 2:10 p.m. (1810 GMT), the Canadian dollarCAD=D4 stood at C$0.9532 the U.S. dollar, or $1.0491, from C$0.9562, or $1.0458 just prior to the statement.
The Canadian dollar was still lower than Tuesday's North American finish of C$0.9518.
One headwind for the Canadian dollar is uncertainty over the May 2 election, with support for the left-leaning New Democrats surging. [ID:N29210714]
Big gains for the party could trigger a knee-jerk drop in the currency and Canadian equity markets as investors fret about NDP plans to raise corporate taxes, spend more and redo energy policy. [ID:nN27126329]
The prospect of an NDP-led minority government is a negative for the Canadian dollar given the view that the party is less business friendly and less focused on austerity, said Camilla Sutton, chief currency strategist at Scotia Capital.
"It's not something that brings dollar/Canada to C$1.05, it's something that weighs and has Canada underperform some of the crosses," she said.
BOND AUCTION DECENT
Canadian bond prices were weaker after the FOMC statement.
"We've seen a bit of an unwind of the rally yesterday. Yields have bounced back in Canada and the U.S. The Fed was a bit of a non-event," said Kam Bath, fixed income strategist at RBC Capital Markets.
The two-year bond CA2YT=RR, which is especially sensitive to policy moves by the Bank of Canada, was down 6.5 Canadian cents to yield 1.773 percent, while the 10-year bond CA10YT=RR lost 39 Canadian cents to yield 3.237 percent.
Canada's sale of three-year government bonds on Wednesday met with solid demand.
"It was a decent auction, considering the situation -- coming half an hour before the FOMC," said Bath.
"It's second time the bank has auctioned an August maturity bond, so there was some trepidation around that, but just given how well the two-year August maturity went, this was in line with that."
The C$3 billion auction produced an average yield of 2.251 percent, a higher yield than the last three-year auction in March. [CA/AUC]
There were more than C$7.3 billion in bids from primary dealers, producing a bid-to-cover ratio of 2.448. The ratio, a measure of investor demand, was slightly lower than the March three-year auction, but nearly on par with previous auctions in February in December. (Editing by Jeffrey Hodgson)
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