CANADA FX DEBT-GDP data lifts C$ to 3-1/2 yr high; eyes on BoC

Mon Feb 28, 2011 5:03pm EST
 
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   * C$ jumps to $1.0299, highest point since Nov. 2007
 * Ends at $1.0294, up three-quarters of a cent
 * Canada Q4 GDP strong, adds pressure for rate hike
 * Bond prices slide
 * Bank of Canada policy announcement Tues morning
 (Updates to close)
 By Ka Yan Ng
 TORONTO, Feb 28 (Reuters) - Canada's dollar jumped to its
highest level against the U.S. dollar since November 2007 on
Monday after fourth-quarter GDP data topped expectations and
backed predictions that the Bank of Canada will resume interest
rate hikes in the first half of the year.
 Annualized GDP growth in the quarter was 3.3 percent,
boosted by surging exports and strong consumer spending,
Statistics Canada said.
 Statscan also revised third-quarter GDP growth to 1.8
percent from 1.0 percent. Economists polled by Reuters had
expected annualized growth of 3.0 percent in the fourth
quarter. [ID:nSCLSDE79U]
 Bank of Canada Governor Mark Carney had conceded earlier
this month that the bank's January forecast of 2.3 percent
growth in the fourth quarter was likely short of the mark,
suggesting the export strength was a surprise.
 "It's certainly above market expectations, but more
importantly above the BoC's expectations," said Jonathan
Basile, economist at Credit Suisse in New York.
 The currency CAD=D4 rose as high as C$0.9710 to the U.S.
dollar, or $1.0299, its firmest level since November 2007.
 It finished mildly off the session high at C$0.9714 to the
U.S. dollar, or $1.0294, up three-quarters of a cent from
Friday's North American finish of C$0.9787 to the U.S. dollar,
or $1.0218.
 Few technical barriers stood in the currency's path as it
surged to the highest levels reached before the global
financial crisis. [ID:nN17237763]
 A second economic report also offered support to the
currency, with higher exports helping narrow Canada's current
fourth-quarter account deficit. [ID:nN28244157]
[ID:nN28244249]
 EYES ON THE BOC
 The GDP figures come one day ahead of a scheduled Bank of
Canada policy announcement, but analysts see little chance of
the central bank raising interest rates on Tuesday morning.
 Short-dated government bonds fell steeply, responding to
evidence of momentum in Canada's economic recovery, which could
increase the chances of interest rate hikes later this year.
The interest rate-sensitive two-year bond CA2YT=RR dropped 12
Canadian cents to yield 1.842 percent.
 "Expectations for Bank of Canada tightening has moved
forward because of the strong GDP report, but it's not going to
affect (the rate decision) tomorrow," said Sheldon Dong, fixed
income analyst at TD Waterhouse Private Investment.
 Dong said the overnight index swaps market suggests the May
31 policy-setting date is the most likely time that the Bank of
Canada will take its key rate up 25 basis points from the
current 1 percent, which matches a Reuters poll from Feb. 24.
 Market watchers now expect stronger language on the
economic outlook in the Bank of Canada's commentary on
Tuesday's rate decision, which may lay the groundwork for an
interest rate increase in either April or May. [ID:nN24280596]
 "I think we will hear a more two-handed statement from the
Bank of Canada tomorrow, which could set the stage for a rate
hike in coming months," said Sal Guatieri, senior economist at
BMO Capital Markets.
 "(The GDP data) is moving in the right direction,
consistent with an economy that's picking up steam."
 But not all market watchers were convinced that the Bank of
Canada would move quickly on rates, particularly as the
Canadian dollar is now much higher than the parity level the
central bank had assumed in its last Monetary Policy Report in
January.
 "I think it's a good report, stands up to scrutiny, but it
still, in my mind, doesn't change anything for the Bank of
Canada," said Derek Holt, economist at Scotia Capital.
 "I think they're likely to say that we've seen a bit of
growth momentum of late, but we're more concerned about the
developments in global commodities, downside risks to global
growth, compared to the last statement."
 (Additional reporting by Solarina Ho; editing by Rob Wilson)