January 16, 2018 / 9:48 PM / 3 years ago

CANADA FX DEBT-C$ flat vs greenback, all eyes on BoC rate decision due Wednesday

 (New throughout, updates prices, market activity and comments)
    * Canadian dollar at C$1.2434, or 80.42 U.S. cents
    * Bond prices mixed across the yield curve
    * Markets await rate hike Wednesday, clues on outlook

    By Alastair Sharp
    TORONTO, Jan 16 (Reuters) - The Canadian dollar was little
changed against its U.S. counterpart on Tuesday as investors
braced for an expected interest rate hike from the Bank of
Canada on Wednesday.
    At 4 p.m. EST (2100 GMT), the Canadian dollar          was
trading at C$1.2434 to the greenback, or 80.42 U.S. cents,
barely weaker than its Monday close. It traded in a tight range
during the session, but did touch its strongest level in more
than a week at C$1.2397.
    While the market is pricing in a more than 90 percent chance
that the central bank goes ahead with another hike after moving
rates up twice in 2017, the currency may also need a more
aggressive monetary policy outlook to strengthen much from here.
    "The Canadian dollar is perfectly priced for a hike, but
regardless of whatever the decision is, it's still really
important to get a sense of how they characterize the path for
the rest of the year," said Eric Theoret, a currency strategist
at Scotiabank. 
    Scotia outlined four possible outcomes in a note on Tuesday,
saying a "neutral hold" in which the timing of future rate hikes
are uncertain would be a worst case scenario for the loonie,
potentially pushing it to as weak as C$1.29 to the greenback.
    A "hawkish hold" would be modestly negative and a "neutral
hike" modestly positive, while a "hawkish hike" could push it to
C$1.23 in a hurry, the note said.
    "It's really going to be the labor piece that is most
critical," Theoret said, referring to how the bank might alter
language from December about "ongoing­ – albeit diminishing –
slack in the labour market."  
    The Bank of Canada raised interest rates in July for the
first time in seven years and then again in September. Its
benchmark rate sits at 1 percent.
    One major uncertainty that may weigh on the bank's Wednesday
decision is the fate of the North American Free Trade Agreement.
A sixth round of talks to renegotiation the trade deal is due to
place in Montreal from Jan. 23 to 28.       
    Canadian government bond prices were mixed across the yield
curve, with the two-year            down half a Canadian cent to
yield 1.778 percent and the 10-year             rising 12
Canadian cents to yield 2.175 percent.

 (Additional reporting by Fergal Smith; Editing by Phil
Berlowitz and David Gregorio)
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