CANADA FX DEBT-C$ stronger as central bank holds to neutral tone

Wed Mar 5, 2014 4:40pm EST

* Canadian dollar at C$1.1038 or 90.60 U.S. cents
    * Bank of Canada says still concerned about weak inflation
    * Bond prices mixed


    By Leah Schnurr and Alastair Sharp
    TORONTO, March 5 (Reuters) - The Canadian dollar
strengthened against the greenback on Wednesday as the Bank of
Canada held rates steady and struck a neutral tone in its policy
statement, pushing some traders to unwind bets on further loonie
weakness.
    The central bank kept a key rate at 1 percent and fretted
about weak inflation while repeating that its next move on
interest rates could be either up or down. 
    While the bank avoided drastic change to its stance, the
statement nonetheless challenged a creeping assumption among
some strategists and traders that Canada could look to cut rates
after years of holding steady.
    "The bets were just throwing Canada overboard. You're seeing
some of those positions get unwound as they got ahead of
themselves," said Brad Schruder, a director of foreign exchange
sales at BMO Capital Markets.
    The Canadian dollar ended the session at C$1.1038
to the greenback, or 90.60 U.S. cents, stronger than Tuesday's
close of C$1.1100, or 90.09 U.S. cents.
    It has been as weak as C$1.1225 so far this year, but
Schruder said a decent jobs report on Friday could shift the
currency's fair value to a C$1.0850 to C$1.1060 range. 
    "It's not bullish Canada, but it's much less bearish," he
said. 
    Other strategists said the central bank had not changed its
tone significantly since January, and that focus would be on
economic data going forward.
    "At the end of the day, the bottom line is the same.
Everything is data dependent, (and) on hold for the foreseeable
horizon," said Don Mikolich, executive director of foreign
exchange sales at CIBC World Markets in Toronto.
    He added that Friday's jobs and trade data would be the next
chance for the currency to break out of its recent range.
    The Bank of Canada shifted to a more dovish policy stance
last year and left the door open to a cut in interest rates in
its January policy statement, saying it was concerned about the
weak inflation environment.
    Separately, Quebec's separatist government moved to
capitalize on a lead in the polls, launching a provincial
election it hopes will result in a majority government that
could eventually lead to a third referendum on independence from
Canada. 
    Markets were generally less nervous about geopolitical risk
on Wednesday than they had been earlier in the week as the
United States and Russia were set to hold talks on easing
tension over Ukraine. 
    Canadian government bond prices were mixed across the
maturity curve, with the two-year off 0.1 Canadian
cent to yield 1.035 percent and the benchmark 10-year
 up 2 Canadian cents to yield 2.468 percent.
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