CANADA FX-C$ holds near 2-1/2 month high on BoC comments

Wed Jul 20, 2011 1:20pm EDT

* C$ at C$0.9483 to the U.S. dollar, or $1.0545

* Touches highest level since May 2

By Solarina Ho

TORONTO, July 20 (Reuters) - The Canadian dollar held near 2-1/2 month highs against the U.S. dollar on Wednesday after the Bank of Canada sounded more hawkish than expected at its policy meeting on Tuesday, prompting some investors to price in rate hikes sooner rather than later.

The currency added to its gains after the central bank released its Monetary Policy Report on Wednesday morning. It eased modestly following Governor Mark Carney's press conference, when the bank signaled it was in no rush to normalize rates. [ID:nN1E76J0N0]

"Yesterday, I think the market was a bit surprised by how hawkish the Bank of Canada sounded in their communique," said Charles St-Arnaud, Canadian economist and currency strategist with Nomura Securities International in New York.

"Today, the Monetary Policy Report only confirmed and gave a bit more detail on the outlook, on the quarterly forecast," St-Arnaud said. He added that any possible rate move later in the year would be "conditional on what risk is doing, what the tension in Europe's doing."

At 12:40 p.m. (1640 GMT), the currency CAD=D4 stood at C$0.9483 to the U.S. dollar, or $1.0545, up from Tuesday's North American close at C$0.9508 to the U.S. dollar, or $1.0517. Earlier, it rose as high as C$0.9457 to the U.S. dollar, or $1.0574, its best level since May 2.

"There was an upsize in terms of inflationary expectations by the bank in the short term, but really the market sentiment with respect to the Canadian dollar was changed in conjunction with yesterday's policy guidance," said Jack Spitz, managing director of foreign exchange at National Bank of Canada.

Spitz said external factors -- including crude prices and equity market sentiment -- remained influential drivers, in addition to the central bank's comments.

The central bank held its overnight rate at 1.0 percent on Tuesday, as expected, but said core inflation will reach the its 2 percent target earlier than forecast as it sees domestic economic growth accelerating in the second half of 2011, in contrast to rising risks abroad. [nN1E76I045]

"The BoC could have easily bought more time in the face of key global risks but may have felt uncomfortable doing so given that the next best chance to more fully explain any shift in thinking wouldn't have come until the October MPR," Scotia Capital economists Derek Holt and Karen Cordes Woods said in an early note to clients.

Inflation and retail sales data on Friday will likely provide the market with further direction.

Canadian government bond prices were generally lower across the curve, reflecting the possibility that interest rate increases may come before year-end.

The two-year bond CA2YT=RR, which is more sensitive to rate moves, was down 7 Canadian cents to yield 1.517 percent, while the 10-year bond CA10YT=RR lost 27 Canadian cents to yield 2.930 percent.

($1=$0.95 Canadian) (Editing by Rob Wilson)

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