CANADA FX DEBT-C$ hits four-week high after hawkish BoC

Tue Apr 17, 2012 11:00am EDT
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* Touches highest level since Mar 19 at C$0.9865
    * BoC holds rate at 1 pct, raises outlook
    * Bond prices drop, underperform Treasuries

    By Jon Cook	
    TORONTO, April 17 (Reuters) - The Canadian dollar touched a
near one-month high against its U.S. counterpart on Tuesday
after the Bank of Canada said it may need to start hiking rates
due to firmer-than-expected growth and inflation as well as a
less hostile global backdrop.	
    The central bank left its key interest rate at 1 percent as
expected at its scheduled monetary policy announcement. But it
forecast Canada's economy will return to its full capacity - the
speed limit at which it can grow without generating excessive
inflation - in the first half of 2013, at least a quarter
earlier than it previously predicted. 	
    Analysts said the bank's tone in Tuesday's statement was
more hawkish than expected and seemed to signal rate hikes
sooner than previously predicted. The prospect of higher
interest rates tends to help currencies strengthen by attracting
global capital flows.	
    The Canadian currency firmed to a near one-month high at
C$0.9865 versus the U.S. dollar, or $1.0137, after the release
of the bank statement. It was at C$0.9958 immediately before the
    "Pretty much most of the content is positive for the
Canadian dollar," said Camilla Sutton, chief currency strategist
at Scotia Capital.	
    "Higher growth, firmer inflation, headwinds abating, the
biggest domestic risk household debt, the shift higher in growth
profile are all supportive of a stronger CAD and a significant
hawkish turn from the Bank of Canada."	
    At 10:59 a.m. (1459 GMT), the Canadian dollar was
at C$0.9875 against the U.S. dollar, or $1.0127, up more than a
cent from Monday's North American close at C$0.9997 versus the
greenback, or $1.0003. It was on track for its largest
single-day gain this year.	
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the rate
statement traders priced in higher odds of a rate hike later
this year. 	
    "The market is certainly playing (a rate increase) towards
the end of this year," said Mazen Issa, macro strategist at TD
Securities. "The direction for the overnight rate is going to be
up and they've certainly made that the case here."	
    Canadian government bond prices fell after the bank's more
positive economic outlook.	
    The yield on the two-year bond, which is
especially sensitive to Bank of Canada interest rate moves, rose
to 1.376 percent from 1.26 percent just before the release. 	
    The benchmark 10-year bond fell 81 Canadian
cents to yield 2.107 percent. 	
    Canadian government bond prices underperformed U.S.
Treasuries after the news, especially at the short end of the
yield curve.