October 25, 2016 / 4:21 PM / a year ago

CANADA FX DEBT-C$ pares sharp gains as Poloz clarifies 18-month remark

(Adds details on Bank of Canada governor's comments)
    * Canadian dollar at C$1.3327, or 75.04 U.S. cents
    * Bond prices higher across the yield curve

    By Fergal Smith
    TORONTO, Oct 25 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Tuesday but sharp gains made
after its official close on Monday were mostly pared after the
central bank clarified remarks made by Bank of Canada Governor
Stephen Poloz.
    Addressing lawmakers on Monday, Poloz explained that it was
not clear cut that the bank should try to speed up closure of
the output gap - the economy's spare capacity - by cutting
interest rates as it would leave the bank very close to using
unconventional tools. 
    The Bank of Canada said on Oct. 19 it expected the output
gap to close and the economy to return to full capacity around
mid-2018, six months later than previously expected.
    "The uncertainties, they are multi-dimensional, so we just
have to take, we do a fresh judgment every time and we can't
plan it out that way, but our best plan right now we think is to
wait for the next 18 months or so," he said on Monday. 
    However, the remarks that were reported in some media on
Monday were interpreted by the market as conveying that the
central bank is on hold for 18 months. The bank later clarified
those remarks in an email.
    "My statement concerning the need to wait 18 months was in
reference to the time frame over which the output gap is
expected to close," Poloz said in an email. "It was not intended
as a reference to the bank's monetary policy."
    At 11:38 a.m. EDT (1538 GMT), the Canadian dollar 
was trading at C$1.3327 to the greenback, or 75.04 U.S. cents,
stronger than the Bank of Canada's official close of C$1.3386,
or 74.70 U.S. cents.
    The currency's strongest level of the session was C$1.3277,
while its weakest was C$1.3371.
    The Canadian had been on the back foot since the Bank of
Canada acknowledged last week that it had considered cutting
interest rates at its policy meeting.
    It touched its weakest in seven months on Monday at 
C$1.3398.
    Canadian government bond prices were higher across the yield
curve, with the two-year price up 6 Canadian cents to
yield 0.535 percent and the benchmark 10-year rising
30 Canadian cents to yield 1.133 percent.
    The two-year yield fell 3.8 basis points further below its
U.S. equivalent to leave a spread of -31.3 basis points, its
widest since June 2, as Canadian government bonds outperformed.

 (Reporting by Fergal Smith; Editing by Daniel Grebler and James
Dalgleish)

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