CANADA FX DEBT-C$ hits weakest in over 6 years after Bank of Canada rate cut

Wed Jul 15, 2015 4:49pm EDT
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(Updates with fresh comment from CanadianForex and closing
    * Canadian dollar drops as low as 77.17 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.
    "It caught quite a few people off guard ... quite a dramatic
jump," said CanadianForex currency payments analyst Ken Wills.
"It definitely still could still break through that C$1.30 ...
if we don't see it in the next 24 hours, it will probably act
like a psychological barrier."
    The Canadian dollar finished at C$1.2920 to the
greenback, or 77.40 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$1.2958, or 77.17 U.S.
cents during the trading session.
    "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."
    The cut stands in sharp contrast to the U.S. Federal
Reserve, which reiterated its intention on Wednesday to hike
interest rates this year. 
    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
12 Canadian cents to yield 0.401 percent and the benchmark
10-year rose 55 Canadian cents to yield 1.593
    The Canada-U.S. two-year bond spread widened to -23.2 basis
points, while the 10-year spread widened to -76.5 basis points.

 (Additional reporting by Andrea Hopkins; Editing by Peter
Galloway and David Gregorio)