CANADA FX DEBT-C$ weakens to nearly 6-month low on oil drop, dovish Poloz

Tue Sep 27, 2016 9:51am EDT
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* Canadian dollar at C$1.3266, or 75.38 U.S. cents
    * Bond prices higher across flatter yield curve

    By Fergal Smith
    TORONTO, Sept 27 (Reuters) - The Canadian dollar weakened to
a nearly six-month low against its U.S. counterpart on Tuesday
as oil prices slipped and a speech by Bank of Canada Governor
Poloz suggested the loonie may need to fall further to support
the economy.
    Central banks may find it more challenging to maintain
inflation targets as the world economy becomes more integrated
with increased international trade, Poloz said on Monday.
    Poloz recognized that the economy is not going to respond as
positively to previous falls in the Canadian dollar as forecasts
have long implied, said Adam Cole, global head of FX strategy at
RBC Capital Markets.
    The central bank has had a long-standing expectation that
the economy would rebalance and non-energy sectors would be
boosted by the fall in the Canadian dollar, and there seems to
be a recognition that outcome may continue to be disappointed,
Cole added.    
    U.S. crude prices were down 2.92 percent at $44.59 a
barrel as optimism faded for an output-limiting deal from an oil
producer meeting in Algeria. 
    Losses for the loonie may have been tempered by a view that
Democratic U.S. presidential candidate Hillary Clinton fared
better than rival Donald Trump in a television debate.
    At 9:34 a.m. EDT (1334 GMT), the Canadian dollar 
was trading at C$1.3266 to the greenback, or 75.38 U.S. cents,
weaker than Monday's close of C$1.3237, or 75.55 U.S. cents.
    The currency's strongest level of the session was C$1.3164,
while it touched its weakest since Mar. 28 at C$1.3281.
    Canadian policymakers are facing increased pressure to
support the country's lackluster economy as infrastructure
spending takes time to kick in and record high debt loads dampen
the impact of stimulus cheques. 
    The implied probability of a Bank of Canada rate cut by
mid-2017 has increased to around 50 percent from less than 20
percent before a weaker-than-expected inflation report on
Friday, overnight index swaps data shows. 
    Canadian government bond prices were higher across a flatter
yield curve, with the two-year up 2 Canadian cents to
yield 0.489 percent and the benchmark 10-year rising
33 Canadian cents to yield 0.959 percent.    
    Canada's gross domestic product data for July is due on
Friday. The economy is expected to have grown by 0.3 percent,
which would reinforce expectations that it rebounded in the
third quarter after contracting in the second. 

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli)