CANADA FX DEBT-C$ rises in GDP data afterglow, bond yields up

* C$ jumps more than 1 U.S. cent to 96.06 cents

* Bond yields rise as rate hike expectations edge up

* Canada economy roars back to life in Q4

* Bank of Canada rate announcement on Tuesday in focus

By Ka Yan Ng

TORONTO, March 1 (Reuters) - Canada’s currency soared against the U.S. dollar on Monday, while government bonds fell after data showed Canada’s fourth-quarter economic growth beat estimates, raising the possibility that the Bank of Canada could raise interest rates sooner than it had planned.

The better-than-expected data lit a fire under the Canadian dollar, lifting it to its highest level in almost a week as investors deliberated whether the Bank of Canada would back away from its conditional pledge to keep rates at their current record low level until the end of the second quarter.

The Canadian dollar closed at C$1.0416 to the U.S. dollar, or 96.06 U.S. cents, up from Friday’s close at C$1.0525 to the U.S. dollar, or 95.01 U.S. cents. Its session high was C$1.0410 to the greenback, or 96.06 U.S. cents.

“It’s a real bellwether day for the Canadian dollar,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

With the Canadian economic outlook improved significantly, markets players were eagerly looking forward to the Bank of Canada’s policy announcement on Tuesday for hints on the interest rate outlook. [ID:nN25256606]

All 12 primary securities dealers surveyed by Reuters expect the Bank of Canada to maintain its overnight target rate at its current 0.25 percent. [ID:nN25112645] CABOCR=ECI

If the Bank of Canada does little to change its tone or language in its statement on Tuesday, the currency may lose some of Monday’s gains.

“I think that some of today’s enthusiasm may be unwound tomorrow, but I can’t fully blame the market for its response because, undeniably, the Canadian economy is suddenly looking rather good,” Lascelles said.

Strong consumer spending and new housing construction helped boost Canada's annualized economic growth in the fourth quarter of 2009 to 5.0 percent, Statistics Canada said, exceeding market expectations for a 4.1 percent increase and the Bank of Canada's 3.3 percent projection. [ID:nN01244875] ECONCA

“At this point, I think the bank does have scope to maintain its conditional commitment of holding the overnight rate unchanged until the end of the second quarter, although certainly the probability is rising that they may have to move in advance of that,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.


Canadian bond yields edged higher after the GDP data, and decoupled from U.S. Treasuries, which were more in tune with a safety bid spurred by mixed U.S. economic data and unresolved worries about Greece’s debt. [US/]

U.S. consumer spending rose for a fourth straight month in February but manufacturing activity increased more slowly than expected, suggesting patchiness in the U.S. recovery that may result in low interest rates for some time. [ID:nN01245103]

“It’s extraordinarily rare for Canadian bonds to sell off while U.S. bonds simultaneously rally,” Lascelles said.

“But that’s precisely what you would expect in the context of a market that is rather anxiously beginning to price in Bank of Canada rate hikes as a consequence of the GDP numbers.”

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged higher after the GDP data, showing the market saw tightening as slightly more likely. BOCWATCH

The two-year Canadian government bond CA2YT=RR dropped 14 Canadian cents to C$100.30 to yield 1.350 percent, while the 10-year bond CA10YT=RR fell 7 Canadian cents to C$102.73 to yield 3.403 percent.

Canadian bonds underperformed their U.S. counterparts across the curve, with the difference between 10-year yields narrowing to 20.5 from 22.4 on Friday. (Editing by Peter Galloway)