January 19, 2010 / 1:42 PM / 8 years ago

C$ slips lower after central bank statement

4 Min Read

TORONTO (Reuters) - Canada's dollar fell against the greenback on Tuesday after the Bank of Canada held interest rates steady and tweaked its growth outlook, citing weak U.S. demand and a strong Canadian currency as risks to recovery.

The central bank kept its overnight lending rate at 0.25 percent and repeated its conditional commitment to maintain that level until the end of the second quarter.

It also said it now expects 2010 growth of 2.9 percent, down from its previous 3.0 percent forecast, and 2011 growth of 3.5 percent, up from its previous 3.3 percent forecast.

The currency fell as low as C$1.0350 to the U.S. dollar, or 96.62 U.S. cents, its lowest level since January 13, from around C$1.0305 just before the announcement.

"It's in relationship to what the market believes the Bank of Canada will and will not do. It's pretty clear from their policy statement that they're in no hurry to raise rates," said Jonathan Basile, economist at Credit Suisse Securities

"It's going to take some time to get more hawkish. They're not ready to put that hat on yet."

The Canadian dollar finished at C$1.0307 to the U.S. dollar, or 97.02 U.S. cents, down from its close of C$1.0265 to the U.S. dollar, or 97.42 U.S. cents, on Monday.

Doug Porter, deputy chief economist at BMO Capital Markets, said the market may be interpreting the bank's statement as slightly dovish.

"There might have been some expectation in the market that the bank would be a little bit firmer in when they moved off their conditional commitment," he said.

"It seems the currency market is interpreting the press statement as being ever so slightly dovish but the currency was under pressure in any event heading into this, for broader reasons."

All of the 11 primary dealers surveyed last week by Reuters had forecast the central bank would stand pat on rates this week and most expected it to keep the key overnight rate at its current level until the end of the second quarter. All see a rate hike at some point this year.

The market will now turn its focus to Thursday's Monetary Policy Report, the bank's quarterly economic projection, and an ensuing press conference by Governor Mark Carney.

Before the bank's statement on Tuesday, the Canadian currency had sagged as commodity prices lost steam and investors piled back into the greenback after a holiday weekend in the United States.

But the currency trimmed losses as the price of oil, a key Canadian export, rebounded above $79 a barrel as U.S. stocks rallied, while gold prices were also firmer.

Also on Tuesday, a report showed that Canada's composite leading indicator jumped 1.5 percent in December, the largest month-on-month increase for almost 27 years, pushed up by household spending and a surging stock market.

Bonds Little Changed

Canadian bond prices were little changed across the curve, with virtually muted moves as the Bank of Canada failed to significantly surprise the market, said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial.

"There's no reason from the bank and nothing major from the U.S.," he said.

The two-year Canada bond ticked 2 Canadian cents higher to C$99.98 to yield 1.264 percent, while the 30-year bond slipped 10 Canadian cents to C$115.75 to yield 4.043 percent.

Canadian bonds mostly outperformed U.S. issues with the 30-year yield 56 basis points below its U.S. counterpart, compared to around 54 basis points in the previous session.

Elsewhere, the Bank of Canada said on Tuesday it would further scale back on extraordinary money market operations it brought in to cope with the financial crisis, the latest sign of growing confidence in the recovery.

Additional reporting by Claire Sibonney; editing by Rob Wilson

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