CANADA FX DEBT-C$ little changed as it recovers from 4-1/2-year low

Thu Mar 20, 2014 4:38pm EDT

* Canadian dollar at C$1.1242 or 88.95 U.S. cents
    * Bond prices lower across the maturity curve

 (Adds details, quote, updates prices)
    By Leah Schnurr
    TORONTO, March 20 (Reuters) - The Canadian dollar was little
changed against the greenback on Thursday, recovering after
hitting a 4-1/2-year low as investors mulled whether a raise in
U.S. interest rates could come sooner than had been anticipated.
    Federal Reserve Chair Janet Yellen said on Wednesday the Fed
will probably end its massive bond-buying program this fall, and
could start raising rates around six months later.
 
    The possibility of a U.S. rate hike on the horizon had
weighed on the Canadian dollar earlier in the day, but optimism
that a stronger economic recovery south of the border will
benefit Canada's economy helped the currency recoup its losses.
The loonie also firmed against several other major currencies.
    "It's the broader feeling that if the U.S. is actually
moving toward a potential interest rate hike as early as the
second quarter of 2015, if the economy is that strong, that's
actually probably beneficial to Canada in the longer run," said
Camilla Sutton, chief currency strategist at Scotiabank in
Toronto.
    "It's still negative for the Canadian dollar against the
U.S. dollar, but it's positive for the Canadian dollar against
other crosses like the euro." 
    The Canadian dollar ended the North American
session at C$1.1242 to the greenback, or 88.95 U.S. cents,
slightly firmer than Wednesday's close of C$1.1245, or 88.93
U.S. cents. The currency earlier traded as low as C$1.1279, its
weakest since July 2009. 
    The rethink on U.S. rates comes at a time when the Bank of
Canada has left the door open to a possible rate cut. 
    Bank of Canada Governor Stephen Poloz warned of the risk of
a prolonged period of sluggish growth and low interest rates in
a speech earlier this week that analysts said was more dovish
than expected. 
    When asked whether he could rule out a rate cut, Poloz said
he could not, which markets latched on to and sent the Canadian
dollar lower over the past two sessions.
    "Poloz is recognizing that the only way to grow the Canadian
economy at this point is through the export channel, so even
though he won't admit it, he would like to see a weaker
currency," said David Tulk, chief Canada macro strategist at TD
Securities in Toronto.
    The loonie has traded in a relatively narrow range in recent
weeks, consolidating after a sharp selloff in January. Some
analysts expect the move lower over the past couple sessions
could mark a return of the bearish attitude prevalent at the
start of the year.
    "What's transpired this week has been very, very important
in the sense that we now have a Bank of Canada governor who
appears more dovish than we expected and a Fed chair who appears
more hawkish than we expected, the combination of which is
Canadian dollar negative," said Sutton.
    Combined with expected economic underperformance against the
United States and negative sentiment over the currency, "it does
provide reason to think investors are back into building short
Canadian dollar positions," she said.
    Canadian government bond prices were lower across the
maturity curve, with the two-year off 2 Canadian
cents to yield 1.073 percent and the benchmark 10-year
 down 19 Canadian cents to yield 2.499 percent.

 (Editing by James Dalgleish)
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