CANADA FX DEBT-C$ rises as economy races; rate hike seen

Mon May 31, 2010 4:44pm EDT
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   * C$ closes at 95.83 U.S. cents, session high 96.02 U.S.
 * Boosted by report Q1 GDP grew at 6.1 pct annual rate
 * Bond prices extend fall after unexpectedly strong data
 * Market largely prices in June 1 interest rate hike
 By Claire Sibonney and Jeffrey Hodgson
 TORONTO, May 31 (Reuters) - The Canadian dollar rallied on
Monday after stellar quarterly growth figures added to
expectations that Canada will be the first Group of Seven
country to raise interest rates since the global recession.
 The currency firmed after data showed Canada's economy
expanded at the fastest clip in more than a decade in the first
quarter, with consumer spending and a hot housing market
helping boost gross domestic product by 6.1 percent at an
annual rate. [ID:nN31253710]
 The Canadian dollar CAD=D4 jumped to a session high of
C$1.0414, or 96.02 U.S. cents, shortly after the report, its
strongest level since May 19.
 "The risk backdrop was minorly favorable for the Canadian
dollar (overnight) and then that basically carried over into
the North American session with the stronger-than-expected GDP
numbers domestically, adding to that upward momentum," said
George Davis, chief technical analyst at RBC Capital Markets.
 But market watchers said trading was light given the U.S.
and British long weekends and a lack of direction from flat
overseas equity markets. [MKTS/GLOB]
 The Canadian dollar CAD=D4 closed the North American
session at C$1.0435, or 95.83 U.S. cents, well up from Friday's
finish at C$1.0520 to the U.S. dollar, or 95.06 U.S. cents.
 Still, the currency was down nearly 2.7 percent on the
 Overnight index swaps, which reflect market expectations
for the Bank of Canada's key rate, were pricing in an 84
percent probability of a 25 basis point hike on Tuesday.
BOCWATCH [ID:nN25118365]
 "It seems like if anything, expectations of a bank hike are
gelling a little bit more in the market's eye and the GDP data
did nothing to sway that view," said Doug Porter, deputy chief
economist at BMO Capital Markets.
 Davis said that until the central bank's decision on
Tuesday morning, the Canadian dollar is likely to trade between
C$1.400 to C$1.0500.
 Given that a rate hike is already largely priced into the
market, Davis said investors will be closely reading the Bank
of Canada's accompanying statement for clues on future moves.
 "The tone of the accompanying statement will be probably a
more important factor then the actual announcement itself
assuming we get a rate hike," he said.
 "If we don't get a rate hike then I certainly think the
Canadian dollar is at the risk of weakening."
 Given the strong domestic data, growing rate hike
expectations and stabilizing equity markets, Canadian bond
yields edged higher across the curve.
 The two-year Canadian government bond CA2YT=RR lost 25
Canadian cents to yield 1.848 percent, and the 10-year bond
CA10YT=RR shed 50 Canadian cents to yield 3.36 percent.
 "Some of those flight to quality gains that we saw last
week and the week before in the bond market are slowly starting
to unwind," Davis said.
 However, he added, similar to the FX markets, flows have
been extremely quiet. "Everybody is just waiting to see what
happens tomorrow now."
 (Editing by Peter Galloway)