August 10, 2010 / 7:48 PM / in 7 years

CANADA FX DEBT-C$ cuts losses, bonds rise after Fed statement

* C$ pares losses to 96.84 U.S. cents

* Bonds firm; 10-yr yield hits lowest level since April

* U.S. Fed says to buy long-dated debt (Adds details)

By Ka Yan Ng

OTTAWA, Aug 10 (Reuters) - The Canadian dollar recovered some of the session’s losses against the U.S. currency on Tuesday after the U.S. Federal Reserve renewed its pledge to keep interest rates low and said it would reinvest mortgage bond proceeds.

The Canadian currency rebounded to as high as C$1.0298 to the U.S. dollar, or 97.11 U.S. cents, from C$1.0360 to the U.S. dollar, or 96.53 U.S. cents before the announcement.

By 3:30 p.m. (1930 GMT), the Canadian dollar was at C$1.0326 to the U.S. dollar, or 96.84 U.S. cents, still down from Monday’s finish at C$1.0267 to the U.S. dollar, or 97.40 U.S. cents.

The Fed’s rate decision, widely expected, also accompanied the U.S. central bank’s announcement that it would begin funneling proceeds from its maturing mortgage bonds into longer-term government debt in an effort to support the sputtering U.S. recovery. The U.S. dollar responded by erasing gains against the euro. [FRX/] [ID:nWALMHE6AQ]

Still, the Fed’s announcement wasn’t enough to overcome other factors such as weak data and commodity prices, while the soft U.S. economic profile also weighed on Canada, its biggest trading partner.

“That’s keeping (the Canadian dollar) underperforming. The U.S. Federal Reserve expressed some concern over the U.S. economy, and it also has a negative impact on the Canadian dollar,” said Sacha Tihanyi, currency strategist at Scotia Capital.

Earlier, the currency was weighed down by overnight Chinese trade data that spurred concerns the country’s domestic demand was cooling faster than thought. As well, Canadian housing data offered further evidence of a slowing housing sector at home. [ID:nTOE679078] [ID:nTOE67904G] [ID:nN10156666]

BOND PRICES FIRM, UNDERPERFORM U.S.

Canadian bond prices were firmer across the curve after the Fed’s announcement, but lagged similar moves by their U.S. counterparts.

Long-dated bonds found the most favor, as this was the area of the curve the Fed plans to focus on.

“Basically, the view is quantitative easing has increased in likelihood and in fact it is happening on a small scale again,” said Eric Lascelles, chief macro strategist at TD Securities.

“The bond market is the epicenter here, especially in the long end of the U.S. ... Canada has just been caught up in the fuss, so Canada’s market in general is rallying but not keeping pace with the U.S.”

The two-year bond CA2YT=RR was up 3 Canadian cents to yield 1.432 percent, while the 10-year bond CA10YT=RR added 29 Canadian cents to yield 3.043 percent, after hitting its lowest point since April. (Reporting by Ka Yan Ng; editing by Rob Wilson)

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