CANADA FX DEBT-C$ firms on oil, less dovish than expected Bank of Canada

Wed May 25, 2016 5:39pm EDT
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(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
    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)