CANADA FX DEBT-C$ falls, bonds add to gains after Q2 GDP

Tue Aug 31, 2010 9:25am EDT
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 * C$ falls to 94.07 U.S. cents
 * Bonds add to gains
 * Q2 GDP grows at 2.0 percent annual rate, below forecast
 * GDP data casts doubts on Sept Bank of Canada rate move
 (Adds details)
 By Ka Yan Ng
 TORONTO, Aug 31 (Reuters) - Canada's currency hit a session
low against the U.S. dollar, while bond prices added to gains,
after a report showed Canadian economic growth slowed sharply,
casting doubt on whether the Bank of Canada will raise interest
rates next month.
 Canada's dollar weakened to C$1.0662 to the U.S. dollar, or
93.79 U.S. cents, down from around C$1.0635 to the U.S. dollar,
or 94.03 U.S. cents, just before the data.
 By 9:05 a.m. (1305 GMT), it had pared losses to C$1.0630 to
the U.S. dollar, or 94.07 U.S. cents, as the details of the
report were a bit more positive than the headline suggested.
But the currency still still held weaker from Monday's close at
C$1.0605 to the U.S. dollar, or 94.30 U.S. cents.
 The two-year bond CA2YT=RR jumped 12 Canadian cents to
yield 1.187 percent, while the 10-year bond CA10YT=RR rose 13
Canadian cents to yield 2.763 percent.
 Gross domestic product grew 2.0 percent at annual rates,
down from 5.8 percent in the first quarter, Statistics Canada
said. Analysts had predicted 2.5 percent annualized GDP growth
in the March-June period. [ID:nSCLVJE651]
 Statistics Canada also revised its first-quarter figure
down from 6.1 percent reported initially. The second-quarter
reading was also well below the Bank of Canada's projection of
3 percent expansion.
 But analysts were heartened by final domestic demand in the
data as business investment picked up and imports grew rapidly,
while the June figures suggest a firm handoff to the third
 "If you look through the details, it's not quite as
disappointing as the headline figure," said Mark Chandler, head
of Canadian fixed income and currency strategy at RBC Capital
Markets. "It still makes it a very very tight call for next
week's rate meeting."
 As the final piece of Canadian economic data that will feed
into expectations of whether the Bank of Canada will raise
interest rates next month, the below-forecast GDP reading sent
market pricing much lower for a rate hike.
 "This definitely raises more questions than answers on
(whether the Bank of Canada will raise rates)," said Doug
Porter, deputy chief economist at BMO Capital Markets.
 "It pretty unquestionably will be a drag on the currency."
 After the data, markets on Tuesday boosted expectations
that the Bank of Canada will leave rates unchanged at its next
policy decision, as measured by a Reuters calculation of yields
on overnight index swaps.BOCWATCH
 That compares to near-certainty among Canada's primary
securities dealers in a Reuters poll on Aug. 20, which forecast
the central bank will raise its key rate by a quarter-point to
1.0 percent next month, with many arguing that rates are
unsustainably low. [CA/POLL]
 The central bank has raised rates twice since the beginning
of June.
 North American stock index futures continued to point to
lower open to track overseas equities markets, while commodity
prices were also softer, on a day where a long list of economic
indicators are on tap.
 Apart from the Canadian GDP data, there is also a rash of
U.S. data on Tuesday, including consumer confidence and the
Chicago purchasing managers index. ECON
 Minutes from the U.S. Federal Reserve's last board meeting
are also due, giving investors further insight into divisions
within the Federal Open Market Committee and its August 10
decision to buy longer-term Treasury securities.
 (Additional reporting by Claire Sibonney, John McCrank and
Jennifer Kwan; Editing by Padraic Cassidy)