September 3, 2008 / 12:27 PM / 9 years ago

Canadian dollar rallies on BoC rate announcement

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal in this April 28, 2006 file photo.Shaun Best</p>

TORONTO (Reuters) - The Canadian dollar shot higher versus the U.S. dollar on Wednesday and recouped all its early losses as the Bank of Canada held its key interest rate steady and gave no timing for when it might cut rates again.

The central bank's decision not to offer any signal for future interest rate cuts also stripped shorter-dated bonds of gains made earlier in the session.

At 10:05 a.m. (1405 GMT), the Canadian unit was at C$1.0614 to the U.S. dollar, or 94.22 U.S. cents, up from C$1.0686 to the U.S. dollar, or 93.58 U.S. cents, at Tuesday's close.

The surge in the dollar, which at one point hit C$1.0578 to the U.S. dollar, or 94.54 U.S. cents, came after the central bank left its key rate steady at 3 percent and delivered a statement that lessened the odds for a rate cut in October.

Most Canadian primary securities dealers did not expect the bank to alter its key overnight rate, but many had thought the accompanying statement would signal that rate cuts were on the horizon.

Instead, the bank said the current level of the target for the overnight rate remains appropriately accommodative, which leaves little chance of a rate cut for the rest of 2008.

"There was a wide spectrum of views on what the bank would do and say today and I think this came in near the least dovish end of the spectrum for the market," said Doug Porter, deputy chief economist at BMO Capital Markets.

"That hit the short end of the bond market and put support into the Canadian dollar."

The Canadian currency immediately rallied and erased all of its early losses that had put it as low as C$1.0777 to the U.S. dollar, or 92.79 U.S. cents. That marked the second straight day the domestic dollar had fallen to its lowest level since mid-August 2007.

The initial slide in the Canadian dollar was pegged to a drop in oil prices below $109 a barrel, which is a negative for the domestic currency since Canada is a key oil exporter.

BOND PRICES RATTLED

Shorter-dated bonds were knocked lower as dealers pocketed earlier gains as the Bank of Canada did little to suggest an interest rate cut could be coming anytime soon.

Canadian bond prices had been higher across the curve earlier given the combination of a lower Canadian dollar, follow through from the slide in equities on Tuesday and the slim possibility of a Bank of Canada rate cut.

The two-year bond was down 20 Canadian cents at C$99.99 to yield 2.754 percent, while the 10-year fell 15 Canadian cents to C$106.10 to yield 3.504 percent.

The yield spread between the two-year and 10-year bond was 71.4 basis points, down from 85.9 basis points at the previous close.

The 30-year bond was up 8 Canadian cents at C$117.23 for a yield of 3.987 percent. In the United States, the 30-year treasury yielded 4.356 percent.

The three-month when-issued T-bill yielded 2.48 percent, up from 2.43 percent at the previous close.

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