September 5, 2012 / 12:07 PM / in 5 years

Canadian dollar down on global fear; little Quebec, BoC impact

TORONTO (Reuters) - Canada’s dollar weakened against its U.S. counterpart on Wednesday, as ongoing worries about the global economy and European monetary policy overshadowed a Bank of Canada rate decision and an election in French-speaking Quebec.

The Bank of Canada left its main policy rate unchanged but stuck to it tightening bias. And the separatist Parti Quebecois resumed power in the province of Quebec, winning enough seats to form a minority government.

But currency traders were more focused on a key European Central Bank meeting on Thursday, debating whether a plan to tackle to euro zone’s debt crisis and slowing growth will be as bold as hoped. <MKTS/GLOB>

The impact of slowing growth in China on commodity prices also added to concerns. <O/R>

“In the global context of things, right now, the market - whether it’s Canada or anyone else - is really going to be focused on what happens from the ECB,” said Mazen Issa, macro strategist with TD Securities.

“Right now, I think the Bank of Canada is probably happy to take a back seat to global developments and watch what it means for Canada more generally.”

BANK OF CANADA STILL HAWKISH

The Bank of Canada kept its main policy rate at 1 percent, as expected, and stuck doggedly to its message that it may have to raise interest rates despite a global slowdown, predicting the domestic economy would gain momentum this year and next and inflation return to target within a year.

The Canadian dollar pared some losses immediately after rate decision, before sliding further to hit a session low of C$0.9914 against the U.S. dollar, or $1.0087.

The central bank’s hawkish tone stands in contrast to the U.S. Federal Reserve and other central banks, who have been contemplating further stimulus moves. But most market players expect the Bank of Canada to hold steady until at least 2013. <CA/POLL>

“It was pretty much as expected. No fundamental change in the very mild tightening bias. Overall, nibbling on the edges, there were some hints of slightly less hawkishness here,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“There wasn’t much meat on these bones ... And I think that’s exactly what the bank wants. I don’t think they were trying to send any big message here.”

At 10:02, the Canadian dollar stood at C$0.9902, versus the U.S. dollar, or $1.010, weaker than Tuesday’s North American finish at C$0.9858, or $1.0144.

QUEBEC BONDS OUTPERFORM

The Quebec election had limited currency impact. The Parti Quebecois edged ahead of the ruling Liberals on Tuesday. But the fact the party won a minority government effectively ruled out the possibility of another referendum to separate from Canada in the near term.

“Having the PQ minority in place does bode well, have better implications in terms of the Canadian assets, the Canadian dollar, some of the bonds,” said TD’s Issa.

“Heading into the election, (the minority result) was already built in, that was the expectation. Now that we’ve actually had that result...the Canadian dollar movement, it probably has less to do with that than broader market sentiment.”

The gap between Canadian and Quebec government bond yields narrowed, an indication that investors felt more comfortable with the province’s debt and were demanding less of a risk premium.

The yield on Quebec’s benchmark 30-year government bond was 121 basis points above its Canadian counterpart on Wednesday morning, down from 123 basis points before the election results were announced.

Canadian government bonds were mixed, with the two-year bond climbing 3 Canadian cents to yield 1.102 percent. The benchmark 10-year bond price was down 7 Canadian cents, to yield 1.745.

Editing by Jeffrey Hodgson

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