October 18, 2010 / 8:52 PM / in 10 years

CANADA FX DEBT-C$ weaker ahead of BoC rate decision

   * C$ ends lower at 98.61 U.S. cents
 * Market awaits Bank of Canada statement on Tuesday
 * Bonds prices follow U.S. Treasuries higher
 (Updates to close, adds details)
 By Jennifer Kwan
 TORONTO, Oct 18 (Reuters) -  The Canadian dollar dropped
against the U.S. dollar on Monday, slipping further from its
recent flirtation with parity, ahead of the Bank of Canada's
interest rate decision on Tuesday.
 The market is pricing in a near certainty that the central
bank will hold its overnight target rate at 1.0 percent, while
the tone of its statement will be closely followed for further
direction. [ID:nN15144891]
 The currency was a "laggard today" in anticipation of
potentially dovish news to accompany the Bank of Canada's
policy decision, and the central bank's Monetary Policy Report
on Wednesday, said Jack Spitz, managing director of foreign
exchange at National Bank Financial.
 "With rate hike expectations completely taken off the table
now for the bank, the market focus will be on the wording and
any downscaling of Canadian and global economic forecasts will
ultimately hit the Canadian dollar," he said.
 Earlier on Monday, the Canadian dollar CAD=D4 fell as
much as a penny to C$1.0229 to the U.S. dollar, or 97.76 U.S.
cents before recovering somewhat as commodity and equity prices
climbed, while the greenback weakened. [MKTS/GLOB] [FRX]
 It ended the session at C$1.0141 against the U.S. dollar,
or 98.61 U.S. cents, down from Friday's finish at C$1.0118 to
the U.S. dollar, or 98.83 U.S. cents
 Many forecasters expect the central bank will stand pat on
rates until 2011 after three increases this year. Markets are
pricing in a 90 percent probability that the overnight rate
will remain unchanged on Tuesday, according to a Reuters
calculation based on yields on overnight index swaps. [CA/POLL]
 "I think it's largely priced in the bank will pause, so the
question is what kind of pause is it. Is it a pause that lasts
or is it a pause that leaves open the option of raising rates
again?" said Michael Gregory, senior economist at BMO Capital
 "Anything that suggests that this pause is going to last
very long, that's going to weigh a bit on the currency.
Anything that suggests the Bank of Canada is holding close the
option of resuming the rate hikes at some point, that helps the
Canadian dollar."
 More broadly, the expectation of quantitative easing by the
Federal Reserve -- essentially creating new money to buy assets
-- had recently been driving the U.S. dollar lower and
higher-yielding currencies, such as Canada's, higher.
 As a result, the Canadian dollar cracked parity against the
greenback last week.
 Spitz said he is eyeing key technical ranges of resistance
at C$1.0230 to the U.S. dollar, and support at
 Canadian bonds rose along with U.S. Treasuries, which
climbed as bargain hunters emerged after recent losses and the
Federal Reserve bought more medium-term notes to maintain ample
cash in the banking system. [US/]
 The two-year bond CA2YT=RR was up 3 Canadian cents to
yield 1.418 percent, while the 10-year bond CA10YT=RR rose 28
Canadian cents to yield 2.761 percent.
 (Additional reporting by Claire Sibonney)

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