CANADA FX DEBT-C$ buoyed by China hopes, hawkish Bank of Canada

Wed Dec 5, 2012 5:02pm EST

* C$ firms to C$0.9917 vs US$, or $1.0084
    * Bank of Canada, global growth hopes lift sentiment
    * Bond prices higher across the curve

    By Solarina Ho
    TORONTO, Dec 5 (Reuters) - Canada's dollar touched a more
than one-week high against its U.S. counterpart on Wednesday as
investor sentiment remained upbeat a day after the Bank of
Canada's statement on interest rates and signs that China's
economic recovery was on track.
    Canada's central bank held its overnight lending rate steady
on Tuesday at 1 percent, as expected, but the bank's unwavering
opinion that it may need to eventually hike interest rates, not
cut them, boosted confidence in the currency, and it
outperformed most other majors, including the euro.
 
    "We're still seeing a bounce related to the hawkish tone in
the Bank of Canada statement yesterday. That's helping to
support Canadian dollar sentiment," said Karl Schamotta, a
Calgary-based senior market strategist with Western Union
Business Solutions.
    The prospect of higher interest rates tends to support
currencies by attracting international capital flows.
    Meanwhile, new Chinese Communist Party chief Xi Jinping said
the world's second-largest economy will maintain its fine-tuning
of economic policies in 2013 to ensure stable economic growth,
sparking a broad rally in equities, commodities and
growth-related currencies.  
    The Canadian dollar finished the session at
C$0.9917 versus the greenback, or $1.0084, firmer than Tuesday's
North American close at C$0.9932, or $1.0068. Earlier, the
currency touched C$0.9908, or $1.0093, its strongest level since
Nov. 27.
    The currency also outperformed the commodity-linked
Australian dollar. Earlier this week the Reserve Bank of
Australia cut interest rates to a record-matching low of 3
percent after the country's resource-reliant economy was hit by
lower export revenues, government cutbacks and a decelerating
mining boom.
    "The Bank of Canada certainly looks like the last man
standing," said Schamotta.
    The currency remained within its recent narrow range around
C$0.9962 and C$0.9906, however, and failed to sustain its move
through the 100-day moving average of C$0.9913. A close stronger
than that could have fueled a near-term Canadian dollar rally to
the C$0.9875 area, said Jeremy Stretch, head of FX strategy at
CIBC World Markets in London.
    "Looking ahead to the employment numbers on Friday  may
well be one caveat which will prevent too aggressive a CAD rally
at least until then," he said, adding that he was expecting a
slightly disappointing number below consensus.
    Both Canada and the United States will release November
employment figures on Friday. Economists expect the United
States to have added 93,000 jobs and Canada to have added 10,000
jobs. 
    "The jobs report will be a huge influence ... I think the
key thing there is we're looking to see if recent stability in
jobs will continue in the U.S., and we certainly saw signs of
nascent improvement in numbers over the last couple of months,"
said Schamotta.
    "I do expect overall sentiment to begin slipping here and to
continue slipping really, which would pull it back closer to the
par mark over the next few days," he said, but added that he did
not expect the currency to substantially break out of its
current trading range until the new year.
    Economists and currency strategists polled by Reuters expect
the Canadian dollar to strengthen against its U.S. counterpart
over the next year, with a recovering global economy and a
possible Bank of Canada interest rate increase providing
support. 
    Over six months, the survey saw the currency strengthening
to C$0.9800, or $1.0204, and holding at that level a year from
now. 
    However, investors are still on edge as talks between the
White House and Congress to avoid year-end tax hikes and
spending cuts showed little progress. 
    Canadian bond prices were higher across the curve. The
two-year bond climbed 2.5 Canadian cents to yield
1.046 percent, and the benchmark 10-year bond gained
6 Canadian cents to yield 1.688 percent.
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