October 24, 2012 / 1:12 PM / 5 years ago

Canadian dollar stronger after hawkish central bank statement

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, boosted by a hawkish statement from the Bank of Canada on Tuesday that stands in stark contrast to most other developed economies.

The central bank was expected to set the currency's direction for a second straight session, with Bank of Canada Governor Mark Carney holding a news conference following the release of its Monetary Policy Report later on Wednesday.

Traders will study the report and Carney's comments for clues on how the bank will balance its desire to eventually withdraw stimulus and discourage excessive household debt with global economic headwinds.

"Anyone who expects the Bank of Canada to be raising rates in the next six or twelve months is living in a fantasy land," said David Bradley, director of foreign exchange trading at Scotiabank.

The bank surprised markets on Tuesday by leaning towards higher interest rates and issuing a fairly upbeat outlook on growth, adding for the first time that soaring household debt could justify eventual rate increases.

At 8:44 a.m. the Canadian dollar was trading at C$0.9896 to the greenback, or $1.0105, compared with C$0.9927, or $1.0074, at Tuesday's North American close.

Gains were limited by a broader rise in the greenback against most major currencies. Signs that Germany, Europe's largest economy, may have entered a recession added to a gloomy global picture that led to an appreciation in the safe haven currency. <MKTS/GLOB><FRX/>

The Canadian dollar was stronger against other major currencies, including the euro, the Japanese yen and the Swiss franc, but underperformed the Australian dollar, which was helped by signs China is making a slow, steady recovery.

Bradley said that further weakness in U.S. equity markets and oil prices could limit movement in the Canadian dollar, which he suggested would find it difficult to weaken though U.S. dollar parity or gain beyond C$0.9880 in the near term.

"I don't see it having a big move today," he said, adding that a medium-term range could find resistance in the mid-97s.

Canadian government debt prices slipped across the curve, with the two-year bond off 5 Canadian cents to yield 1.166 percent, while the benchmark 10-year bond fell 24 Canadian cents to yield 1.878 percent.

Editing by Jeffrey Hodgson

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