April 22, 2010 / 12:40 PM / 7 years ago

Loonie ends at par with U.S. dollar

TORONTO (Reuters) - The Canadian dollar ended slightly weaker on Thursday to trade exactly at par with the greenback as a less hawkish-than-expected policy report by the central bank reduced some demand for the currency.

The Bank of Canada laid the groundwork to raise interest rates from their record lows, and said it was time to start withdrawing some of the unprecedented monetary stimulus that helped pull Canada out of recession.

But the quarterly Monetary Policy Report was seen as less aggressive than language used by the central bank on Tuesday that left most investors convinced it will start hiking rates in June.

“It wasn’t quite as stridently as hawkish as the press statement on Tuesday,” said David Watt, senior currency strategist at RBC Capital Markets.

“As a result of that, people weren’t necessarily today looking for reasons to go long, risky securities,” Watt said.

Currencies usually strengthen as interest rates rise because higher rates tend to attract capital flows.

The Canadian dollar finished at exactly C$1 to the U.S. dollar, slightly lower than Wednesday’s finish at C$0.9992 to the U.S. dollar, or $1.0008.

The currency touched a high of C$0.9961 to the U.S. dollar, or $1.0039, in the overnight session on the lingering effects of Tuesday’s central bank statement.

The Bank of Canada is the first in the Group of Seven rich countries to hint at an interest rate hike, possibly as early as June 1.

Overhanging the market, however, were increased concerns about Greece’s fiscal health. Greece’s 2009 budget deficit was much bigger than previously thought, data showed on Thursday, while Moody’s Investors Service downgraded its rating of Greek government debt.

The Canadian dollar briefly firmed following the Monetary Policy report, but had difficulty pushing higher.

However, a late day rally in U.S. stocks on a strong corporate earnings helped lure investors back to assets perceived to be riskier, including the Canadian currency.

Market watchers will now shift their focus to Friday’s March inflation report for potential hints on when Canada’s central bank might hike rates, currently at 0.25 percent, as well as retail sales data.

“We’ve had a couple of upside surprises especially to core inflation so the market will certainly be more reactive to the core numbers,” said Watt.

“If we get core lingering around 2 percent or another upside surprise the market will probably move to greater confidence of a June move. If it is somewhat below there will be somewhat of a debate over July.”

Most of Canada’s primary securities dealers now say the Bank of Canada will raise interest rates in June instead of July after the bank on Tuesday dropped its conditional pledge to hold rates steady.

BONDS MIXED

Canadian bond prices were mixed, but had been higher for most of the day on broader Greece concerns and the central bank’s report.

“The Canadian bond market rebounded today, led by the front of the curve and the belly of the curve. They’ve been the two areas of the curve that have been beaten up lately,” said Fergal Smith, managing market strategist at Action Economics.

“Part of it was flight to quality this morning surrounding Greece. In addition, the Bank of Canada’s MPR was less hawkish than the market had feared.”

The two-year government bond was up 5 Canadian cents at C$99.06 to yield 2.019 percent, while the 10-year bond sagged 6 Canadian cents to trade at C$100.18 and yield 3.727 percent.

Canadian government bonds mostly outperformed U.S. issues, with the two-year yield 99 basis points above its U.S. counterpart, compared with around 104 basis points the previous session.

Editing by Jeffrey Hodgson

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