CANADA FX DEBT-C$ weakest in more than 6 years after Bank of Canada rate cut
(Updates throughout with reaction and comments following Bank of Canada rate decision) * Canadian dollar drops as low as 77.35 U.S. cents * Bond prices higher across the maturity curve By Solarina Ho TORONTO, July 15 (Reuters) - The Canadian dollar tumbled to its weakest level against its U.S. counterpart since March 2009 on Wednesday after the Bank of Canada cut its key interest rate for a second time this year as the economy struggles. The central bank announced a 25-basis-point cut to 0.5 percent, saying an unexpected economic contraction during the first half of the year had added excess capacity and put downward pressure on inflation. "We were calling for a rate cut so we're not shocked, but it was admittedly a very close call, and clearly the market was not fully expecting this and we've seen a big reaction in both bonds and especially the Canadian dollar," said Doug Porter, chief economist at BMO Capital Markets. "Clearly the economy has disappointed in a significant way through the first half of the year, and it is not entirely due to the oil shock." At 10:33 a.m. EDT (1433 GMT), the Canadian dollar was at C$1.2902 to the greenback, or 77.51 U.S. cents, significantly weaker than its level just before the central bank announced the rate move, and sharply off the Bank of Canada's official close of C$1.2740, or $78.49 U.S. cents, on Tuesday. The currency weakened to as much as C$1.2929, or 77.35 U.S. cents, after the announcement. The cut stands in sharp contrast to the U.S. Federal Reserve, which reiterated its intention on Wednesday to hike interest rates this year. "The currency is in uncharted waters here. If the Fed is hiking, we think by September, and the Bank of Canada appears to be leaving the door open to additional rate stimulus all bets are off," said Scotiabank economist Derek Holt. "You face the material risk that the currency overshoots and goes to C$1.30 and keeps on climbing to C$1.40." In addition to driving the Canadian dollar to more than six-year lows, the move spurred gains in Canadian government bond prices, which outperformed U.S. Treasuries. The bond prices, which were lower before the decision, rose across the maturity curve. The two-year price was up 11.5 Canadian cents to yield 0.403 percent and the benchmark 10-year rose 37 Canadian cents to yield 1.612 percent. The Canada-U.S. two-year bond spread widened to -26.4 basis points, while the 10-year spread widened to -79.6 basis points. (Additional reporting by Andrea Hopkins and Alastair Sharp; Editing by Peter Galloway)
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