April 13, 2011 / 5:57 PM / 9 years ago

CANADA FX DEBT-C$ retreats as BoC again flags currency worry

   * C$ falls to $1.0356 after Bank of Canada policy report
 * Bank repeats concern about C$'s "persistent strength"
 * Bond prices head higher as stock rally loses steam
 (Updates with details)
 By Ka Yan Ng
 TORONTO, April 13 (Reuters) - The Canadian dollar turned
lower against the U.S. dollar on Wednesday, spurred by more
warnings from the Bank of Canada that the strength of the
currency will dampen economic growth.
 In a news conference following release of the bank's
quarterly Monetary Policy Report (MPR), bank Governor Mark
Carney was asked whether the sharp appreciation of the Canadian
dollar was effectively tightening monetary conditions, allowing
the bank to delay rate hikes.
 He flagged it as an "additional risk" to the outlook for
growth and inflation, reinforcing the Bank of Canada's strong
language on the Canadian dollar's "persistent strength" after
the bank left interest rates steady at 1 percent, as expected,
on Tuesday. [ID:nN12159489] [ID:nN13293182]
 A strong Canadian dollar is a concern because it hampers
export growth in an export-oriented economy.
 The Canadian dollar CAD=D4 retreated as low as C$0.9656
to the U.S. dollar, or $1.0356. By 1:20 p.m. (1720 GMT), it was
at C$0.9643 to the U.S. dollar, or $1.0370, slightly weaker
than Tuesday's North American finish. The Canadian dollar
closed at its lowest level in a week on Tuesday as oil prices
fell and the central bank warned about the impact of the
currency's continued strength.
 "You're seeing a certain consolidation in the currency
after yesterday's selloff," said David Tulk, chief Canada macro
strategist at TD Securities.
 The detailed forecasts revealed in the MPR supported the
view that the bank is not about to lift borrowing costs in May.
Overnight index swaps, which trade based on expectations for
the key central bank rate, show a slim 7.37 percent chance of a
rate hike on May 31, the bank's next policy-setting date.
 A September rate hike remains fully priced in by the market
with a 25 basis point rise seen, although bets on that were
also trimmed following the MPR. 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.
 Also hurting the Canadian dollar on Wednesday, oil prices
turned lower after an early rise and stock markets were off
morning highs.
 The flight from riskier assets pushed Canadian government
bonds higher, resuming an upward march on lowered expectations
of a near-term Canadian interest rate hike.
 The two-year bond CA2YT=RR, which is especially sensitive
to Bank of Canada policy moves, was was up 8 Canadian cents to
yield 1.814 percent, while the 10-year bond CA10YT=RR gained
28 Canadian cents to yield 3.382 percent.
 (Reporting by Ka Yan Ng; editing by Peter Galloway)

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