September 27, 2017 / 9:56 PM / 3 years ago

CANADA FX DEBT-C$ slides the most in 8 months as Poloz dampens rate hike bets

 (Adds analyst quotes and updates prices)
    * Canadian dollar at C$1.2478, or 80.14 U.S. cents
    * Loonie touches its weakest level since Sept. 1 at C$1.2483
    * Currency suffers biggest drop since January
    * Canada-U.S. 2-year spread narrows by 4.9 basis points

    By Fergal Smith
    TORONTO, Sept 27 (Reuters) - The Canadian dollar suffered
its biggest drop in eight months  against the greenback on
Wednesday while short-term bond yields fell after Bank of Canada
Governor Stephen Poloz dampened expectations for further
interest rate hikes this year.
    At 5 p.m. EDT (2100 GMT), the Canadian dollar          was
trading at C$1.2478 to the U.S. dollar, or 80.14 U.S. cents,
down 1 percent, which was its deepest loss since Jan. 18 when
the central bank had said a rate cut remained on the table. 
    The currency's strongest level of the session was C$1.2336,
while it touched C$1.2483, its weakest since Sept. 1.    
    "It's been a pretty tough day for the Canadian dollar," said
Jimmy Jean, senior economist at Desjardins Capital Markets. "The
big driver today was the Poloz speech, which the market quickly
labeled as dovish."
    Poloz said the central bank will closely watch movements in
longer-term interest rates and the exchange rate as it considers
how to follow its two recent interest rate hikes.             
    The mention of the currency is the "big takeaway," said Eric
Theoret, currency strategist at Scotiabank.
    The loonie has rallied nearly 8 percent this year. A further
rapid appreciation of the loonie could put the brakes on the
country's economy just as it is gaining momentum.               
    Chances of another Canadian rate hike this year fell to 81
percent from almost 100 percent before the release of Poloz's
remarks, overnight index swaps data showed.               
    Losses for the loonie came as the U.S. dollar        rose to
more than a one-month high against a basket of currencies, as
optimism about U.S. fiscal reforms boosted sentiment in favor of
the greenback.             
    Prices of oil, one of Canada's major exports, edged higher,
helped by an unexpected drop in U.S. crude inventories. U.S.
crude        prices settled 26 cents higher at $52.14 a
    Canadian government bond prices were mixed across the yield
curve, with the two-year            price up 4.5 Canadian cents
to yield 1.583 percent and the 10-year             falling 17
Canadian cents to yield 2.134 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent narrowed by 4.9 basis points to a spread of 10.4
basis points.

 (Reporting by Fergal Smith; Editing by Paul Simao and Phil
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