CANADA FX DEBT-C$ edges higher versus US$ ahead of BoC decision

Tue Jan 22, 2013 5:02pm EST

* C$ ends at C$0.9927 to US$, or $1.0074
    * Weaker versus euro, Aussie, Kiwi
    * Retail sales jump provides little support

    By Claire Sibonney and Alastair Sharp
    TORONTO, Jan 22 (Reuters) - The Canadian dollar edged higher
against its U.S. counterpart on Tuesday but weakened
significantly versus a string of other currencies as investors
awaited a Bank of Canada policy announcement on Wednesday.
    The central bank is not expected to touch interest rates
until the fourth quarter as it tries to balance a fragile
domestic economy and cooling housing market with an anticipated
rebound in global growth. But investors will be watching the
statements closely for any shift in its tightening bias.
 
    The Bank of Canada is also due to release fresh economic
predictions next week. It is likely to scale back its economic
growth projections, as the October estimate of 2.5 percent
annualized growth in the fourth quarter of 2012 now looks much
too optimistic.
    "Clearly the Bank of Canada is going to have to recognise
the weaker-than-forecast growth in the final part of 2012,
however at the same time they are likely going to recognise the
diminished event risks globally," said Greg Moore, foreign
exchange strategist at TD Securities.
    Canada's dollar appeared to brush off stronger-than-expected
retail sales, and got some mixed signals from global stock
markets. 
    Still, the S&P 500 climbed to a fresh five-year closing high
on hopes that the global economy continues to mend. And Canadian
stocks touched their highest level in more than a year.
  
    "If you look at the correlations between equities and the
Canadian dollar, they are still extremely strong," added Moore.
    The slip in the Canadian dollar extended a recent split from
the fate of commodities and equity markets and showed much more
sympathy with the U.S. currency.
    "It's symptomatic of a slightly worse turn for the U.S.
dollar, which tends to drag the Canadian dollar down on the
crosses," said Royal Bank of Canada currency strategist Elsa
Lignos.
    The Canadian dollar ended the North American
session at C$0.9927 to the greenback, or $1.0074, very slightly
firmer than Monday's North American session close at C$0.9932,
or $1.0068.
    It weakened against its commodity-linked counterparts, near
a five-month low against the Australian, a 10-month
low against the New Zealand dollar, and hit a
nine-month trough against the euro at C$1.3261, or
75.41 euro cents.
    Strategists said the euro was likely to remain firm as
concerns around the European debt crisis ease.
    The currency took little direction from record high domestic
retail sales data released on Tuesday, which showed shoppers
bought more new cars and electronics.  
    "Retail sales is another piece of positive data that will
help cap Canadian weakness going forward," said Michael O'Neill,
vice president of foreign exchange trading at Jitneytrade. But
he warned, "You can't read too much into Canada solo."
    RBC's Lignos said the Canadian dollar was near the top of
its expected range for the week and would be unlikely to weaken
much further without a major surprise from the Bank of Canada's
policy announcement due on Wednesday. 
    "The Bank of Canada is the pick of the week for Canada, but
I don't think it can do enough to displace some of the bigger
macro stories out there at the moment," she said, adding that
downside support was found at C$0.9860 and resistance existed at
C$0.9980.
    Canadian bond prices edged up across the curve. The two-year
bond was up 3 Canadian cents to yield 1.174 percent,
while the benchmark 10-year bond gained 21 Canadian
cents to yield 1.910 percent.
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