April 20, 2010 / 8:58 PM / 10 years ago

CANADA FX DEBT-BoC's rate hike signal pulls C$ above parity

 * C$ touches high of $1.0030; jumps on Bank of Canada news
 * Bank of Canada holds rates steady at 0.25 pct
 * Ends conditional pledge to hold rates until end-June
 * Bond prices drop on rate rise expectations
 (Updates to close, adds details and quotes)
 By Jennifer Kwan
 TORONTO, April 20 (Reuters) - Canada's dollar punched
through parity with the U.S. currency on Tuesday after the Bank
of Canada abandoned its conditional commitment to keep rates
steady until the end of June.
 The central bank became the first in the Group of Seven
countries to hint it may raise interest rates, possibly as
early as June 1, as the economy heals after recession. For now,
the bank kept its key rate at its current ultra-low 0.25
percent level. [ID:nN20257669] [ID:nN20103790]
 Currencies usually strengthen as interest rates rise as
higher rates attract capital flows.
 The bank has kept the overnight rate at the current
historic low since April 2009. Until Tuesday it had pledged to
hold it at that level until the end of June unless inflation
strays off the bank's desired path.
 The currency rallied to a high of C$0.9970 to the U.S.
dollar, or $1.0030, as the market interpreted the dropped
commitment as a signal the central bank is now more likely to
hike rates in June than in July, as most in the market had
previously forecast.
 "They have definitely left their options wide open and the
market is responding appropriately," said Doug Porter, deputy
chief economist at BMO Capital Markets.
 The Canadian dollar CAD=D4 finished at C$0.9988 to the
U.S. dollar, or $1.0012, its highest close since late May 2008.
It also ended higher for the first time in four sessions, and
was up from Monday's close of C$1.0148 to the U.S. dollar, or
98.54 U.S. cents.
 The Canadian currency was last at one-for-one footing with
the greenback on April 15.
 "I think Canada wins on either defensive or offensive
market plays over the next year," said Derek Holt, vice
president, economics, at Scotia Capital.
 "If you're worried about political risk and sovereign
default risks globally then Canada offers relative insulation
against those downsides so you'd want to overweight the
Canadian dollar in that scenario," he said.
 "At the same time if you think that the consensus of
economists and market participants is underestimating growth
and the upsides to commodities, then you would want more
offensive weight in Canada."
 Yields on overnight index swaps, which trade based on
expectations for the central bank's key policy rate, edged
higher after the bank's statement was released and now suggest
there is about a 93 percent chance of a June rate hike.
 As well, a Reuters poll conducted on Tuesday following the
statement showed most of the country's primary securities
dealers now say the Bank of Canada will raise interest rates in
June instead of July. [CA/POLL]
 Market watchers say focus now turns to the central bank's
Monetary Policy Report on Thursday and the release of March
inflation data on Friday. [ID:nN19140803]
 Canadian bond prices fell across the curve after the rate
announcement on expectations of a higher rate environment.
  Bond prices typically fall when rates are on the rise as
their fixed payments look less attractive in comparison with
the rising yields on other short-term investments.
 "We've seen an across-the-board selloff with the likelihood
the bank will be acting earlier and more aggressively than
expected," said BMO's Porter.
 The move lower also mimicked U.S. Treasuries, where prices
retreated on Tuesday as strong earnings stalled a safe-haven
rally in U.S. government debt. [US/]
 The two-year government bond CA2YT=RR was down 31
Canadian cents at C$99.09 to yield 2.003 percent, while the
10-year bond CA10YT=RR fell 35 Canadian cents to C$100.37 to
yield 3.702 percent.
 Canadian government bonds mostly underperformed U.S.
issues, with the two-year yield 99.5 basis points above its
U.S. counterpart, compared with around 85 basis points the
previous session.
 (Additional reporting by Claire Sibonney; editing by Peter

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