CANADA FX DEBT-C$, bond yields rise on Bank of Canada surprise

* Bank of Canada avoids immediate money expansion

* C$ finishes at 81.71 U.S. cents

* Bond prices mostly drop after bank report

* Canada retail sales edge up 0.2 percent in Feb (Adds details, quotes)

By Jennifer Kwan

TORONTO, April 23 (Reuters) - The Canadian dollar strengthened but bond prices tumbled on Thursday after the Bank of Canada surprised markets by indicating it is in no rush to use unconventional policies to spur the slumping economy

The bank provided an outline on how it might go about boosting the money supply by purchasing financial assets, also known as quantitative easing, but it said it needed to be prudent and would not be taking any such steps immediately. [ID:nN23255456] [ID:nN23361342]

The currency shot as high as C$1.2227 to the U.S. dollar, or 81.79 U.S. cents, from C$1.2360 to the U.S. dollar, or 80.91 U.S., before the release of the Monetary Policy Report.

“What we’ve seen today is that the market had partially priced in some credit easing and even minor quantitative easing. But what we got was absolutely nothing,” said Matthew Strauss, senior currency strategist RBC Capital Markets.

“When that partially priced-in easing did not materialize it was priced out of the market.”

The currency finished at C$1.2238 to the U.S. dollar, or 81.71 U.S. cents. It had closed at C$1.24 to the U.S. dollar, or 80.65 U.S. cents, on Wednesday.

As in recent sessions, the currency also took direction from equity markets, with the S&P/TSX composite index .GSPTSE helped higher by strength in commodity prices.

Higher oil prices CLc1 and economic news also supported the currency, with data on Thursday showing Canadian retail sales edged up 0.2 percent in February from January, the second straight monthly increase after major declines in November and December. [ID:nN23310364]


Bond prices were mostly lower, particularly at the long end, on disappointment that the central bank’s report provided no commitments to buy anything.

“To the degree that the provincial and corporate markets and others were considered potential targets, they’re all right now reeling,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

“The government bond market is selling off as well simply because there won’t necessarily be that extra buyer in the market.”

The 10-year bond dropped 67 Canadian cents to C$106.33 to yield 3.018 percent. Its price was unchanged before the Bank of Canada news.

The 30-year bond fell 75 Canadian cents to C$121.30 to yield 3.765 percent. In the United States, the 30-year Treasury yielded 3.8036 percent.

Canadian bonds and T-bills underperformed their U.S. counterparts across the curve. The Canadian 30-year bond yield was 3.9 basis points below its U.S. counterpart, compared with about 8 basis points below on Wednesday. (Additional reporting by Ka Yan Ng; editing by Jeffrey Hodgson)