CANADA FX DEBT-C$ bounces to highest in nearly 3 weeks

Thu Mar 27, 2014 4:38pm EDT

* Canadian dollar at C$1.1032 or 90.65 U.S. cents
    * Bond prices mixed across the maturity curve

 (Adds details, quotes, updates prices)
    By Leah Schnurr
    TORONTO, March 27 (Reuters) - The Canadian dollar
strengthened to its highest level in nearly three weeks against
the greenback on Thursday as it continued to recover from a
recent selloff, which investors have deemed overdone.
    The loonie fell to a 4-1/2-year low last week, hit by the
Bank of Canada saying it could not rule out an interest rate cut
and by the prospect of a faster-than-expected timetable for
raising interest rates in the United States.
    But the currency has managed to more than recoup that
decline in recent sessions, with a quiet calendar for domestic
economic data this week providing few catalysts to spur trade.
    The resource-sensitive loonie also got a lift from higher
oil and other commodity prices, and as some of the recent risk
aversion that has weighed on markets eased.
    "For the past six months or so, commodities have really been
a back-burner issue for the Canadian dollar; it's really been
all about monetary policy," said Greg Moore, senior currency
strategist at Royal Bank of Canada in Toronto.
    More dramatic price moves in commodities of late and central
bank dynamics that have not shifted too much have helped bring
the currency's correlation with resources back into greater
focus, said Moore.
    The Canadian dollar ended the North American
session at C$1.1032 to the greenback, or 90.65 U.S. cents,
stronger than Wednesday's close of C$1.1084, or 90.22 U.S.
cents. The currency was at its highest level since early March. 
    The Canadian dollar's strength this week has come as   
investors are realizing that last week's drop may have been an
overreaction, particularly to comments made by Bank of Canada
Governor Stephen Poloz, said Benjamin Reitzes, senior economist
at BMO Capital Markets in Toronto.
    In a speech last week, Poloz warned about the risk of a
prolonged period of sluggish growth and low interest rates. When
asked if he could rule out a rate cut, Poloz said he could not,
which markets latched on to, even as Poloz repeated that the
central bank's stance was neutral.   
    "Things aren't quite as dovish from the Bank of Canada's
perspective as markets thought immediately after his comments,"
Reitzes said.
    From the trough hit last week to Thursday's close, the
Canadian dollar has gained nearly 2 cents.
    Even with this week's stronger tone for the Canadian dollar,
many analysts still expect it to resume a downward path.
    "Our forecast is still for a weaker Canadian dollar. It's
tough to see a good reason to consistently buy Canadian dollars
at this point," Reitzes said.
    "Our forecast is for the U.S. economy to strengthen at a
quicker pace than Canada, so we have Canada improving but not
quite as much as the U.S., and that's likely going to push U.S.
yields relatively higher faster than Canada. They're both going
to move up, the U.S. will move up a little faster, so that will
favor the U.S. dollar," he said.
    Canadian government bond prices were mixed across the
maturity curve, with the two-year off half a Canadian
cent to yield 1.063 percent. The benchmark 10-year 
was up 12 Canadian cents to yield 2.432 percent.

 (Editing by Jonathan Oatis)
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