June 30, 2010 / 2:46 PM / 10 years ago

CANADA FX DEBT-C$ falls after GDP data disappoints market

 * C$ touches low of 94.37 U.S. cents
 * Canada April GDP weaker than expectations
 * Bonds higher as July rate hike questioned
 (Adds details, quotes)
 By Jennifer Kwan
 TORONTO, June 30 (Reuters) - The Canadian dollar slid on
Wednesday after data showed the nation's economy stalled
unexpectedly in April, making the market more dovish on the
speed at which it expects the Bank of Canada to raise interest
 Currencies usually strengthen as interest rates rise as
higher rates attract capital flows.
 The Canadian dollar CAD=D4 touched a low of C$1.0597 to
the U.S. dollar, or 94.37 U.S. cents, after government data
showed real gross domestic product was flat in the month after
seven straight months of expansion, disappointing market
expectations for 0.2 percent growth. [ID:nN30434455]
 "It was a bit of a shock for the markets to see growth as
soft as it was," said Shaun Osborne, chief currency strategist
at TD Securities.
 "I don't think it's a significant blow to second quarter
prospects overall at the moment, but probably means that growth
is a little bit weaker than maybe the (Bank of Canada) had
 At 10:08 a.m. (1408 GMT), Canada's dollar was at C$1.0580
to the U.S. dollar, or 94.52 U.S. cents, down from Tuesday's
finish at C$1.0553 to the U.S. dollar, or 94.76 U.S. cents.
 Osborne said the outlook for the Canadian dollar is weaker
and that it could easily fall to C$1.12 to C$1.15 to the U.S.
 "The risk reward suggests to us that there's a lot less
upside in the Canadian dollar relatively to the downside
potential from here so we favor buying U.S. dollars and selling
Canada," he said.
 The currency switched tracks after the GDP data. Earlier in
the day, it rose on firmer oil prices and on a rebound in
global equity markets as jitters about bank funding in the euro
zone eased. [ID:nLDE65T0VB]
 Increasing nervousness about the fragility of the economic
recovery has seen a sharp turnaround in interest rate hike
 Yields on overnight index swaps, which trade based on
expectations for the Bank of Canada's key interest rate, now
point to a less than 50 percent chance that the bank will raise
rates on its July 20 policy announcement day. As of late
Tuesday, the probability was at 60 percent. BOCWATCH
 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.
 "It's not unreasonable to have a bit of a question mark
against the amount of tightening the bank can introduce because
they've said themselves they are going to be quite sensitive to
the global economic environment, and nothing is written in
stone," Osborne said.
 Canadian government bond prices were slightly higher
Wednesday. The two-year government bond CA2YT=RR climbed 11
Canadian cents to yield 1.345 percent, while the 10-year bond
CA10YT=RR was up 12 Canadian cents to yield 3.078 percent.
  (Reporting by Jennifer Kwan; editing by Peter Galloway)

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