CANADA FX DEBT-C$ at 3-year low as central bank flags weak inflation

Wed Dec 4, 2013 4:52pm EST

* C$ at C$1.0678 vs US$, or 93.65 U.S. cents
    * C$ weakens further after Bank of Canada statement
    * Bond prices mostly lower across maturity curve


    By Leah Schnurr
    TORONTO, Dec 4 (Reuters) - The Canadian dollar weakened to a
3-1/2-year low against the greenback on Wednesday after the Bank
of Canada issued a more dovish-than-expected policy statement,
highlighting the risks of undesirably weak inflation.
    The loonie started the North American trading day on a
weaker foot and selling picked up momentum after the central
bank's statement was released, extending recent losses for the
battered currency. The Canadian dollar has fallen in five of its
last six sessions, dropping through key support levels as
investors have turned bearish. 
    In a statement that showed the central bank is increasingly
concerned about possible disinflation, the Bank of Canada said
the risks of weak inflation now appear greater than they did six
weeks ago. 
    Still, the bank added that the balance of risks remained
within the range of possibilities it identified in its last
policy announcement in October. 
    "It just reinforces the sentiment that it's unlikely we'll
see the Bank of Canada act in terms of moving interest rates for
all of 2014," said Gareth Sylvester, director at Klarity FX in
San Francisco.
    Wednesday's statement was the first following a policy shift
in October, when the central bank dropped any mention of a rate
hike, catching markets off guard.
    Since that October statement, the loonie has lost more than
3 percent. During the period, it has also been pressured by weak
oil prices and the prospect that the U.S. Federal Reserve could
begin winding down its economic stimulus sooner rather than
later.
    The Canadian dollar ended the North American
session at C$1.0678 to the greenback, or 93.65 U.S. cents,
weaker than Tuesday's close of C$1.0649 or 93.91 U.S. cents.
    The loonie eased as far as C$1.0708, its weakest level since
May 2010. 
    While technicals suggest the Canadian dollar could be poised
for a correction back to the C$1.05 area, the currency could hit
C$1.085 in the months ahead, Sylvester said.
    "We don't think necessarily the market has moved too far,
too soon. It has been an orderly grind higher, so I think that
supports the fact the U.S. dollar-Canadian dollar could hold on
to these rallies."
    A Reuters poll released before the Bank of Canada's
statement on Wednesday showed analysts see no reprieve for the
Canadian currency in the coming year, with the loonie forecast
to trade at C$1.08 12 months from now. 
    As was widely expected, the central bank also held its key
interest rate at 1 percent, where it has been since 2010.
October's policy shift has pushed out market expectations for
the next rate hike into 2015. 
    Data earlier in the morning showed Canada unexpectedly
posted a trade surplus of C$75 million ($70.1 million) in
October, the first in 22 months. The Canadian dollar had little
reaction to the data. 
    The two-year bond was unchanged to yield 1.071
percent, while the benchmark 10-year bond fell 41
Canadian cents to yield 2.639 percent.
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