CANADA FX DEBT-C$ touches below US$ parity on dovish-sounding BoC

Wed Jan 23, 2013 5:03pm EST

* C$ ends at C$0.9990 vs US$, or $1.0010

* C$ at weakest level since Nov. 19

* Central bank cuts growth view, rate hike "less imminent"

* Reuters primary-dealer poll signals next hike in Q1 2014

By Claire Sibonney

TORONTO, Jan 23 (Reuters) - The Canadian dollar skidded below parity with the U.S. dollar briefly on Wednesday and underperformed other major currencies after the Bank of Canada held interest rates steady and said a rate increase was "less imminent".

The currency's tumble to a two-month low came after the central bank sharply lowered its expectations for economic growth and said the Canadian economy likely grew by an annualized 1 percent in the fourth quarter, down from its forecast for 2.5 percent growth.

At a press conference following the rate decision, Governor Mark Carney said the direction of the next rate move was clear, but that "the timing has shifted".

Doug Porter, deputy chief economist at BMO Capital Markets, said Carney's remarks were less dovish than the tone of the bank's rate announcement and quarterly monetary policy report.

"It almost seemed like he was trying to scale back the market reaction a smidge, if he actually cares about the daily market reaction," Porter said

In a Reuters poll taken on Wednesday, the median view of Canada's primary dealers was that the Bank of Canada will now hold off raising interest rates until the first quarter of 2014. Primary dealers are the institutions that work directly with the central bank as it carries out monetary policy.

This marked a shift from Reuters' Jan. 16 poll in which primary dealers were split on the timing of a rate hike between the fourth quarter of this year and the first quarter of 2014.

Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders also reduced their bets on a rate hike this year after the announcement.

By the North American session close, the Canadian dollar , however, was back on the stronger side of parity, at C$0.9990 to the greenback, or $1.0010, but was still more than half a cent weaker than Tuesday's close at C$0.9927, or $1.0074.

Shortly after the bank's rate decision, the currency weakened as far as C$1.0005 to the greenback, or 99.95 U.S. cents. That was its softest level since Nov. 19.

Dizzying household credit growth and a hot housing market had been a top concern of both the central bank and the finance ministry, but the bank's language on Wednesday signaled belief that the situation was getting under control.

The price of Canadian government debt rose across the curve, outperforming U.S. Treasuries.

The rate-sensitive two-year bond was up 10 Canadian cents to yield 1.124 percent and the benchmark 10-year bond jumped 35 Canadian cents to yield 1.873 percent.

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