January 28, 2008 / 1:55 PM / 9 years ago

Canadian dollar, bonds, flat ahead of Fed decision

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<p>A graph showing world interest rates from 2000 to now.Graphics</p>

TORONTO (Reuters) - The Canadian dollar was mostly unchanged versus the U.S. dollar on Monday morning as currency investors avoided huge bets ahead of key economic data and the U.S. Federal Reserve's rate decision due later this week.

Domestic bond prices were flat but likely to add to recent gains as North American stock markets look ripe for a volatile session that would heighten demand for the security offered by government debt.

At 8:40 a.m. ET, the Canadian unit was at C$1.0069 to the U.S. dollar, or 99.31 U.S. cents, up from C$1.0070 to the U.S. dollar, or 99.30 U.S. cents, at Friday's close.

The Canadian dollar was barely impacted by the Asian and European stock market declines overnight since it was preceded by Friday's North American equity selloff.

Instead, the Canadian dollar will be directed by moves in North American equity markets this week, which currency traders have been using as a guide for the global economic outlook.

"Because of its commodity-based status, traders are going to focus very much on equities as a guide for (the Canadian dollar)," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

"And from that perspective the (Fed) meeting in the middle of the week will be very important, and at the end of the week the non-farm payrolls data out of the U.S. will be important for the equity market."

The Fed is expected to cut interest rates by as much as 50 basis points to 3.00 percent after a two-day policy meeting that ends on Wednesday.

That would follow the Fed's surprise 75-basis-point cut last week and further widen the Canada-U.S. rate gap, and offer support to the Canadian dollar as the Bank of Canada's key overnight rate is at 4.00 percent.

The benefit of higher gold prices on the Canadian dollar was largely wiped out by a drop in oil prices. Canada is an exporter of both commodities and its currency often follows the prices for each.

The key piece of Canadian economic data due this week is the November gross domestic product report on Thursday, which Strauss suggested will play "second fiddle" to events in the United States.

Bonds Flat

Canadian bond prices were mostly unchanged but looked primed for further gains as anticipation of falling stock prices in North America should offer a boost to fixed-income investments like bonds.

But any moves on domestic bond prices will be limited as dealers await the Fed decision and key data not due later in the week.

"Everyone is looking ahead to the FOMC announcement and that's pretty much where the next cue is going to be," said Max Clarke, an economist at IDEAglobal in New York.

"The slowdown in the U.S. is a significant fear for the Bank of Canada and they'll want to see what comes out of the FOMC statement following the emergency 75-basis-point cut,"

The overnight Canadian Libor rate was at 4.0966 percent and the 3-month Libor rate was at 4.100 percent.

The two-year bond rose 2 Canadian cents to C$101.82 to yield 3.219 percent. The 10-year bond was up 1 Canadian cent at C$101.13 to yield 3.854 percent.

The yield spread between the two-year and 10-year bond was 63.5 basis points, up from 63.1 points at the previous close.

The 30-year bond gained 7 Canadian cents to C$114.48 to yield 4.142 percent. In the United States, the 30-year treasury yielded 4.264 percent.

The three-month when-issued T-bill yielded 3.40 percent, unchanged from the previous close.

Editing by Renato Andrade

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