April 12, 2011 / 9:10 PM / 9 years ago

CANADA FX DEBT-"Perfect storm" drags C$ from 3-1/2 yr highs

   * C$ weakens to C$0.9631 per US$, or $1.0383
 * Bond prices mostly firm
 * Bank of Canada hold rates at 1 percent
 (Updates with details, comments)
 By Solarina Ho
 TORONTO, April 12 (Reuters) - The Canadian dollar retreated
from 3-1/2 year highs on Tuesday as a basket of factors --
including concerns from the Bank of Canada over the "persistent
strength" of the currency, as well as slumping oil and equities
-- pressured the commodities-linked currency.
 The central bank, which held interest rates steady at 1
percent as expected, cautioned that the soaring Canadian dollar
-- which has been near highs not seen since November 2007 --
could create "even greater headwinds for the Canadian
 "Equities were off, oil was off, a lot of the risk
currencies were coming under pressure, commodities were lower;
the floor got pulled out from those hoping for hikes in May,"
said Darcy Browne, managing director of capital markets trading
at Canadian Imperial Bank of Commerce.
 "The Bank of Canada took some of the wind out of the sails
of the Canada bulls who were hoping for near-term interest rate
hikes ... This was a perfect storm for a little back-up in the
Canadian dollar today."
 Adding to the pressure were crude prices that fell more
than 3 percent and sharply weaker global equity markets. The
Toronto Stock Exchange hit its lowest point in nearly four
weeks, as energy and mining shares were battered by a broad
commodities selloff. [ID:nL3E7FC04S] [ID:nN12257134]
 The currency CAD=D4 finished the session at C$0.9631 to
the U.S. dollar, or $1.0383, down from Monday's North American
finish of C$0.9565 to the U.S. dollar, or $1.0455, which was
close to a 3-1/2 year high. This was the Canadian dollar's
weakest close in a week.
 "To me, really, nothing has changed fundamentally in the
world. But on a one day, short-term trade, it was a healthy
correction," said Browne.
 The central bank reiterated comments made in its March 1
policy announcement, hinting that a May 31 interest rate hike
was unlikely. But it set the stage for rate increases later
this year by predicting inflation would hit its target six
months earlier than previously thought. [ID:nN12159489]
 Market focus now is on the Bank of Canada's monetary policy
report and news conference on Wednesday morning, with traders
set to parse any further comments on the strength of the
Canadian dollar.
 "The market's caught between a rock and a hard place here,"
said Browne. "They know the bank probably wants to hike, but
the bank just can't hike when the currency's so strong. Oddly
enough, they'll get their hike if the currency weakens."
 Money market rates and bond yields fell slightly after the
rate announcement as investors trimmed the likelihood of a rate
increase at the Bank of Canada's next policy announcement date
in May. Global factors were also in play.
 "I think the general risk-off trend in global markets today
is the more dominant impact," said David Tulk, chief Canada
macro strategist at TD Securities.
 Overnight index swaps, which trade based on expectations
for the key central bank rate, now show just a 6.13 percent
chance of a rate hike on May 31, compared with 26.61 percent
before the statement.
 A September rate hike remains fully priced in by the market
with a 25 basis point rise seen. BOCWATCH
 In a Reuters poll of economists and strategists released
last week, however, the median forecast was for the bank to
make the first interest rate hike of the year on July 19.
 The two-year bond CA2YT=RR, which is especially sensitive
to Bank of Canada policy moves, was up 14.5 Canadian cents to
yield 1.863 percent, while the 10-year bond CA10YT=RR added
53 Canadian cents to yield 3.423 percent.
 (Additional reporting by Claire Sibonney and Ka Yan Ng;
editing by Rob Wilson)

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