CANADA FX DEBT-C$ drops on Poloz comments, shrugs off new finance minister

Wed Mar 19, 2014 10:09am EDT

* Canadian dollar at C$1.1184 or 89.41 U.S. cents
    * Bond prices lower across the maturity curve

    By Leah Schnurr
    TORONTO, March 19 (Reuters) - The Canadian dollar weakened
to its lowest level in nearly a month against the greenback on
Wednesday, extending the previous session's rout after comments
from the head of the Bank of Canada that analysts said struck a
more dovish tone than expected.
    Analysts said there was little impact on the currency from
news that Energy Minister Joe Oliver will be sworn in on
Wednesday as Canada's new finance minister, following Jim
Flaherty's resignation on Tuesday. The Conservative government
was seen as likely to stay the course on fiscal policy.
 
    Bank of Canada Governor Stephen Poloz warned in a speech on
Tuesday about the risk of a prolonged period of sluggish growth
and low interest rates, while also noting it was unlikely that
bad weather was entirely to blame for recent economic weakness
in Canada. 
    The comments served to reinforce the market's view that
interest rates will stay low for some time. Asked during a press
conference whether he could rule out a rate cut, Poloz said he
could not, though he also said that the bank's stance was
neutral.
    "I think the comments were generally seen as dovish," said
Shaun Osborne, chief currency strategist at TD Securities in
Toronto.
    "The underlying message here is that the economy is still
struggling a little bit, inflation is still very low and stuck
at the low end of the (Bank of Canada's target) range, and we
may need a somewhat softer Canadian dollar to help facilitate
that rotation away from domestic consumption to more export-led
growth."
    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.
    The drop in the loonie likely signals a resumption of the
trade seen in January that took the currency sharply lower,
Osborne said. The Canadian dollar has consolidated in a narrow
trading range since mid-February, but many analysts say the
currency has further to fall.
    Osborne has a target for the loonie to fall to C$1.1760, or
85 U.S. cents, by end of June.
    The Canadian dollar was at C$1.1184 to the
greenback, or 89.41 U.S. cents, weaker than Tuesday's close of
C$1.1137, or 89.79 U.S. cents. The currency fell as low as
C$1.1196, its weakest since late February.
    "The reaction to Governor Poloz's dovish speech and
follow-through in the Asian and European session suggest there
is pent-up demand to increase already short Canadian dollar
positions," Camilla Sutton, chief currency strategist at
Scotiabank, wrote in a note. 
    Investors were also focused on a policy statement from the
U.S. Federal Reserve due later in the day at the conclusion of
its two-day meeting, the first meeting with Janet Yellen at the
helm.
    The Fed is expected to further trim its monthly bond
purchases and could alter its guidance on when it might raise
interest rates. 
    Canadian government bond prices were lower across the
maturity curve, with the two-year off 2 Canadian
cents to yield 1.017 percent and the benchmark 10-year
 down 12 Canadian cents to yield 2.419 percent.

 (Editing by Peter Galloway)
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