CANADA FX DEBT-C$ flat as Bank of Canada cites headwinds; Fed eyed
(Adds strategist comment, updates prices to close) * Canadian dollar settles at C$1.3209, or 75.71 U.S. cents * Bond prices higher across yield curve By Alastair Sharp TORONTO, Sept 20 (Reuters) - The Canadian dollar ended little changed against its U.S. counterpart on Tuesday, recovering from earlier weakness along with U.S. oil as the governor of the Bank of Canada said interest rates will stay low for longer given strong economic headwinds. Investors were also cautious ahead of Japanese and U.S. central bank monetary policy decisions due on Wednesday. "What we have tomorrow from the Fed is the risk of a hawkish hold," said Eric Theoret, currency strategist at Scotiabank, referring to a potential decision to keep rates steady while pointing to firmer inflation data and recent employment growth. The Canadian dollar settled at C$1.3209 to the greenback, or 75.71 U.S. cents, barely weaker than Monday's close of C$1.3207, or 75.72 U.S. cents. The currency's strongest level of the session was C$1.3190, while its weakest level was C$1.3243. Theoret said Scotia sees upside risk to its C$1.30 end-of-year forecast, based on technical signals since May, and that if the currency breaks definitively through C$1.3250 post-Fed, a level tested on Friday and again on Tuesday, selling pressure could push it on to retracement levels around C$1.33 and C$1.35. The commodity-linked currency gained as U.S. oil prices rose into their afternoon settlement. In a speech suggesting the country's central bank will remain on the sidelines even as the economy struggles to gain traction, Bank of Canada Governor Stephen Poloz said corporations need to adjust their expectations for return on investment given the low interest rate environment. "They have shifted the narrative. It's just what is the new narrative? We don't really have that yet," Scotia's Theoret said. Adding to monetary policy uncertainty, the Bank of Japan could shake up its policy stance by providing more bond-purchasing stimulus or pushing its short-term interest rates deeper into negative territory on Wednesday. Canadian government bond prices were higher on the day, with the two-year bond up 2 Canadian cents to yield 0.573 percent and the benchmark 10-year climbing 26 Canadian cents to yield 1.165 percent. Canadian inflation and retail sales data are due on Friday. The annual inflation rate is forecast to have edged up to 1.4 percent in August, while investors will be looking for signs that the federal government's new child benefit payments boosted retail sales. (Reporting by Fergal Smith; Editing by Paul Simao and Meredith Mazzilli)
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