CANADA FX DEBT-C$ gains as Bank of Canada expresses optimism

Wed Jul 13, 2016 5:16pm EDT
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(Adds strategist comment, updates prices to close)
    * Canadian dollar at C$1.2986, or 77.01 U.S. cents
    * Bond prices higher across maturity curve
    * Traders further unwind rate cut bets

    By Alastair Sharp
    TORONTO, July 13 (Reuters) - The Canadian dollar hit its
strongest level since July 7 against its U.S. counterpart on
Wednesday after the Bank of Canada held rates steady and trimmed
its economic forecasts, as traders unwound bets that the central
bank could cut rates this year.
    Still, analysts said the currency faces an uphill battle to
strengthen further despite the central bank's optimism that
exports and business investment would pick up, as economic data
in coming months will likely remain less than robust.
    "You still have a lot of weak data to wade through and the
bar has been set relatively high for growth," said Mark
Chandler, head of Canadian fixed income and currency strategy at
Royal Bank of Canada. "There's room for disappointment in the
near term."
    The Canadian dollar settled at C$1.2986 to the
greenback, or 77.01 U.S. cents, stronger than the Bank of
Canada's official Tuesday close of C$1.3030, or 76.75 U.S.
    It touched C$1.2936 soon after the central bank's updated
outlook was published, versus C$1.3069 just before. 
    Economists said the bank's comments did not do enough to
bolster a minority view that rates would need to be trimmed this
    "While we can't rule it out, I'd say there really isn't much
sense here that the Bank's leaning in that direction, so the
initial reaction has been a stronger Canadian dollar and I think
that's appropriate," said Doug Porter, chief economist at BMO
Capital Markets.
    Overnight index swaps, which track expectations for the
central bank's main policy rate, showed traders reduced bets on
a rate cut following the news. 
    The Canadian currency rose despite a sharp drop in oil
prices after the International Energy Agency warned that a
global supply glut threatened a price recovery and data showed
an unexpected weekly gain in U.S. crude stocks. 
    Canada is a major exporter of oil.
    Canadian government bond prices were higher across the
maturity curve, with the two-year price up 2 Canadian
cents to yield 0.495 percent and the benchmark 10-year
 rising 52 Canadian cents to yield 1.004 percent.
    "What the market is telling us is that they don't believe
that the Bank of Canada is going to be normalizing rates any
time soon," said Royce Mendes, a senior economist at CIBC
Capital Markets, referring to an interest rate hike.
    The Canada-U.S. two-year bond spread narrowed to -17.4 basis
points, while the 10-year spread was at -47.1 basis points.

 (Additional reporting by Susan Taylor and Matt Scuffham;
Editing by Jeffrey Hodgson and Richard Chang)