CANADA FX DEBT-C$ drops to lowest in nearly a week after Poloz comments

Tue Mar 18, 2014 5:07pm EDT

* Canadian dollar at C$C$1.1137 or 89.79 U.S. cents
    * Poloz warns about risk of prolonged sluggish growth
    * C$ holds around session lows after Flaherty resigns
    * Bond prices higher across the maturity curve


    By Leah Schnurr
    TORONTO, March 18 (Reuters) - The Canadian dollar weakened
to its lowest level in nearly a week against the greenback on
Tuesday after comments by Bank of Canada Governor Stephen Poloz
reinforced the view that interest rates will remain low for some
time.
    The Canadian dollar showed little reaction following the
announcement that Canada's finance minister, Jim Flaherty, has
resigned, effective immediately. The currency held steady around
session lows as analysts said the resignation was unlikely to
change Canada's fiscal policy. 
    Market focus stayed on the comments made by Poloz, who
warned about the risk of a prolonged period of sluggish growth
and low interest rates. He also said it is unlikely that bad
weather was entirely to blame for Canada's recent economic
weakness.  
    The speech was viewed as slightly more dovish than expected
and prompted the loonie to reverse course to trade lower. The
currency picked up steam to the downside after Poloz said in
response to a question that he could not rule out an interest
rate cut. 
    Still, Poloz said the bank's stance is neutral and some
analysts said the market's response was overdone. 
    "I would say it was interpreted as more dovish than it
actually was," said Charles St-Arnaud, Canadian economist and
currency strategist at Nomura Securities International in New
York. 
    "A lot of investors have the view that the Canadian dollar
should depreciate meaningfully this year, so some are looking
for any reason to get that trade on."
    The Canadian dollar ended the North American
session at C$1.1137 to the greenback, or 89.79 U.S. cents,
weaker than Monday's close of C$1.1053, or 90.47 U.S. cents. 
    Monetary policy has been a major driver of the Canadian
dollar in recent months after the central bank shifted gears
last year by dropping any mention of interest rate hikes on the
horizon.
    In its most recent policy announcement in early March, the
Bank of Canada continued to express concerns about weak
inflation and repeated that its next move on interest rates
could be in either direction.    
    The view that rates will remain low also weighed on yields
for Canadian government bonds, said Hosen Marjaee, senior
managing director of Canadian fixed income at Manulife Asset
Management in Toronto.
    "Our take is that rates are going to stay low for a long
period. All of 2014 and maybe even a good portion of 2015,"
Marjaee said.
    The loonie had been trading modestly firmer against the U.S.
currency heading into Poloz's speech, boosted by data that
showed Canadian factory sales climbed 1.5 percent in January,
the fastest pace in nearly a year and well above expectations.
    
    Investors were also keeping an eye on the latest
developments out of Russia as Vladimir Putin signed a treaty
making Crimea part of Russia, defying Western sanctions, but
said he did not plan to seize any other regions of Ukraine.
 
    Putin's comments soothed fears in the markets that tensions
in Ukraine could escalate and had helped the Canadian dollar
push higher early in the day.    
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 4 Canadian cents
to yield 1.006 percent and the benchmark 10-year up
24 Canadian cents to yield 2.405 percent.
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