July 26, 2017 / 8:51 PM / 3 years ago

CANADA FX DEBT-C$ surges to two-year high as U.S. dollar slides after Fed

    * Canadian dollar at C$1.2453 or 80.30 U.S. cents
    * Touches C$1.2415, or 80.55 U.S. cents, strongest since
June 2015
    * Bond prices higher across the maturity curve

    By Solarina Ho
    TORONTO, July 26 (Reuters) - The Canadian dollar hit its
strongest level in more than two years against the greenback on
Wednesday after language from the Federal Reserve's policy
statement, which was seen as slightly more dovish than expected,
sent the U.S. currency lower.
    But currency strategists have expressed skepticism the
Canadian dollar can rally much further, with expectations the
Bank of Canada will raise interest rates one more time this year
already fully priced into the market.
    "The market is generally very bearish on the U.S. economy,
the Fed, and on the U.S. dollar," said Benjamin Reitzes, senior
economist and foreign exchange strategist at BMO Capital
Markets. "We're the exact opposite in Canada. I'm not sure how
much longer that dynamic can hold."
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading up 0.5 percent at C$1.2453 per greenback, or 80.30 U.S.
    The loonie earlier pushed through a 2016 support level and
touched C$1.2415, or 80.55 U.S. cents, its strongest level since
June 30, 2015.
    "If the pace we've seen were to continue, that would be an
issue, but if you get a period of stability, I think (the Bank
of Canada) would probably be comfortable-ish with it here," said
    The Canadian dollar has soared 10 percent since early May on
the back of a weaker U.S. dollar and robust economic data that
spurred the Bank of Canada to raise interest rates, while higher
oil prices also supported. Bond yields hit multi-year highs
earlier this week and U.S.-Canada 2-year bond yields spread have
narrowed sharply since June.
   The Fed kept interest rates unchanged as widely expected, but
said it would begin implementing balance sheet normalization
"relatively soon," a change from its June statement, which said
"this year." Economists also noted the Fed's language
acknowledged concerns over a slow inflationary environment.
    The U.S. dollar turned negative against a basket of major
currencies following the statement and touched its lowest level
since June 2016.       
    Canadian government bond prices were higher across the
maturity curve, with the two-year            price up 7.5
Canadian cents to yield 1.287 percent and the benchmark 10-year
            rising 43 Canadian cents to yield 1.968 percent.
    The Canada-U.S. two-year bond spread was -6.9 basis points,
while the 10-year spread was -32.3 basis points.

 (Reporting by Solarina Ho, editing by G Crosse)
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