CANADA FX DEBT-C$ at 1-week high as BoC signals eventual hike

Tue May 31, 2011 10:10am EDT
 
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 * C$ jumps as high as C$0.9653 vs US$, or $1.0359
 * Bond prices extend losses across the curve
 * BoC holds at 1 pct; signals rates will eventually rise
 (Updates with details, commentary)
 By Claire Sibonney
 TORONTO, May 31 (Reuters) - Canada's dollar rallied to its
highest in more than a week against the U.S. dollar on Tuesday
and bond prices fell following more hawkish-than-expected
language from the Bank of Canada.
 The central bank kept its key interest rate unchanged at 1
percent but for the first time since the recession it said it
will have to lift borrowing costs if economic growth continues.
[ID:nN31112740]
 After the announcement, the currency CAD=D4 climbed as
high as C$0.9653 to the U.S. dollar, or $1.0359, up from
C$0.9723 to the U.S. dollar, or $1.0285, immediately before the
scheduled release. It was the Canadian dollar's strongest level
since May 20.
 "It doesn't sound like the central bank is gearing up for a
rate hike in July but the warning that rate hikes will
eventually come suggests that we'll see a few hikes before the
end of the year," said Avery Shenfeld, chief economist at
CIBC.
 "I think the bank was uncomfortable with the market
starting to assume that it was going to wait forever to begin
hiking and with the resulting impact on mortgage rates, which
have been falling."
 Shenfeld noted that, ironically, this will add a bit of
upward pressure for the Canadian dollar's value, as the
currency's strength was a factor delaying a rate hike rather
than accelerating it.
 The Canadian dollar was already on stronger footing heading
into the statement as global risk sentiment was lifted by
Greece bailout hopes. [MKTS/GLOB]
  At 9:45 a.m. (1345 GMT), the Canadian dollar CAD=D4 was
at C$0.9663 to the U.S. dollar, or $1.0349, up from C$0.9771 to
the U.S. dollar, or $1.0234, at Monday's close.
 The move finally pushed the currency out of its tight
C$0.9735-C$0.9817 range in the last six sessions.
 "Markets clearly are assuming rates are going to go up
before the year end, but the statement is maybe a little bit
more hawkish than had been assumed, so it could provide some
support for the Canadian dollar," said Paul Ferley, assistant
chief economist at Royal Bank of Canada.
 Overnight index swaps, which trade based on expectations
for the key central bank policy rate, showed investors slightly
reducing the likelihood of a rate hike in July, but increasing
the odds of tightening in September, October and December.
BOCWATCH
 The market sees a 94.2 percent chance rates will stay on
hold in July, up slightly from 93.56 percent just before the
announcement on Tuesday.
 Canadian bond prices extended losses across the curve after
the rate announcement. Canada's two-year bond CA2YT=RR was
down 13 Canadian cents to yield 1.576 percent, while the
10-year bond CA10YT=RR retreated 27 Canadian cents to yield
3.094 percent.
 Later in the session, Canadian Finance Minister Jim
Flaherty is set to meet with private sector economists to round
out growth forecasts ahead of the introduction of the federal
budget on June 6. [ID:nN25109201]
 (Reporting by Claire Sibonney; Editing by Kenneth Barry)