CANADA FX DEBT-C$ firms on oil, less dovish than expected Bank of Canada
(Updates prices) * Canadian dollar ended at C$1.3022, or 76.79 U.S. cents * Loonie touched its strongest since May 19 at C$1.3015. * Bond prices lower across the maturity curve By Fergal Smith TORONTO, May 25 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil approached $50 a barrel and after the Bank of Canada's statement was less dovish than some investors had expected. The Bank of Canada kept interest rates on hold at 0.50 percent on Wednesday, saying the economy would shrink in the second quarter as a result of damage from recent wildfires in Alberta before rebounding later in the year. "It's a fairly neutral looking statement," said Shaun Osborne, chief currency strategist at Scotiabank, who added that the loonie benefited from a relief rally after the central bank was seen as not as dovish as some had expected. Overnight index swaps implied almost no chance of a rate cut this year after having implied a 40 percent probability just two weeks ago when a raging wildfire cut oil production in Alberta's oil sands region. The wildfire is also set to crimp corporate earnings beyond the oil patch, weighing on the rail and hospitality sectors in particular. Oil approached $50 a barrel after the U.S. government reported a larger-than-expected drop in crude inventories. U.S. crude settled 94 cents higher at $49.56, after earlier peaking at a seven-month high. Adding to support for risk-sensitive, commodity-linked currencies, such as the Canadian dollar, stocks climbed as risk eased that Britain and Greece would leave the European Union, while German business morale improved more than expected in May. The Canadian dollar closed at C$1.3022 per greenback, or 76.79 U.S. cents, much stronger than Tuesday's official close of C$1.3146, or 76.07 U.S. cents. The currency's weakest level was C$1.3133, while it touched its strongest since May 19 at C$1.3015. Still, the loonie has fallen more than 4 percent since May 3 when it touched a 10-month high of C$1.2461, as it is currently pressured by speculation that the U.S. Federal Reserve will raise interest rates as early as next month and a weaker outlook for Canada's economy following a strong start to 2016. Canadian government bond prices were lower across the maturity curve, with the two-year price down 2 Canadian cents to yield 0.639 percent and the benchmark 10-year falling 21 Canadian cents to yield 1.387 percent. The Canada-U.S. 10-year bond spread was 1.1 basis points less negative at -48.3 basis points as Canadian government bonds underperformed across much of the curve. (Reporting by Fergal Smith, editing by G Crosse)
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