CANADA FX DEBT-C$ firmer after Bank of Canada keeps hike bias

Tue Dec 4, 2012 10:15am EST

* Canada dollar stronger at C$0.9924 vs US$, or $1.0077
    * Bank of Canada holds overnight rate at 1 pct, keeps hike
bias
    * Canada dollar could strengthen in coming weeks
    * Bond prices mixed

    By Solarina Ho
    TORONTO, Dec 4 (Reuters) - The Canadian dollar strengthened
to a session high against the U.S. dollar on Tuesday after the
Bank of Canada kept interest rates on hold and maintained its
rate-increase stance, reiterating its position from October
despite a softening economy.
    The central bank held its overnight lending rate untouched
at 1 percent, as expected, the longest period of inactivity
since the early 1950s. Investors were focused on the bank's
language for any indication its intent to tighten monetary
policy has shifted.  
    Bank of Canada Governor Mark Carney, who will take the reins
at the Bank of England next July, has been signaling a need to
raise the main policy rate since April, making the country the
only industrialized nation to lean toward a rate increase.
    "The key is that they're keeping word for word to the bias
that they introduced in October ... I think the real test for
the bank and markets will be whether we do get a reversal in the
economic data in the weeks ahead, or it continues to
deteriorate," said Doug Porter, deputy chief economist at BMO
Capital Markets.
    "I think that's going to determine whether they stick to
that bias in early 2013."
    Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
announcement traders scaled back their small bets on a rate cut
in 2013. 
    At 9:56 a.m. (1432 GMT), the Canadian dollar was at
C$0.9924 versus the U.S. dollar, or $1.0077, compared with
C$0.9949, or $1.0051, at Monday's North American session close.
It firmed to a session high of C$0.9920, or $1.0081 after the
Bank of Canada's announcement.
    Camilla Sutton, chief currency strategist at Scotiabank
noted the Canadian dollar has held back while other currencies
rallied, but could now strengthen over the next few weeks to
C$0.9750, or $1.0256.
    "The Canadian dollar wasn't (rallying) as it was waiting for
the Bank of Canada risk to pass. Now that it's passed, this type
of steady-as-she-goes statement opens up the potential for
Canadian dollar strength," Sutton said.
    Canada's dollar was mostly underperforming other major
currencies, including the Australian dollar, where it hit its
weakest level in three weeks.
    The currency, which often tracks moves in global equity and
commodity markets, failed to take direction from other market
factors for the most part on Tuesday, focusing instead on the
Bank of Canada.
    Elsewhere, the euro hit a six-month high and European shares
and peripheral euro zone bonds added to recent gains Tuesday, as
optimism over Greece's plan to buy back debt and signs of
progress elsewhere in the bloc boosted sentiment. 
    Meanwhile, the price of oil, a key Canadian export, slipped
as weak manufacturing data and protracted U.S. budget
negotiations fanned concerns about the health of the global
economy. 
    Canadian bond prices were somewhat mixed. The two-year bond
 down one Canadian cent to yield 1.067 percent, and
the benchmark 10-year bond down 4 Canadian cents to
yield 1.703 percent.
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