CANADA FX DEBT-C$ retreats a bit more; focus on central bank

Fri Apr 11, 2014 4:58pm EDT

* Canadian dollar at C$1.0979 or 91.08 U.S. cents
    * Bond prices higher across the maturity curve
    * Focus on Bank of Canada, CPI next week

 (Updates to close)
    By Andrea Hopkins
    TORONTO, April 11 (Reuters) - The Canadian dollar eased for
a second session on Friday after strong gains earlier in the
week, hurt by a slide in global stock markets and firm U.S.
economic data, as the market turned its attention to Wednesday's
Bank of Canada policy statement.
    Global equity markets fell as fears on Wall Street about
over-stretched stock valuations spread to Asia and Europe,
pushing investors to the safety of bonds. Traders cited
contagion from the correction in the United States, though some
said a positive stock market trend is still intact. 
    U.S. data showed producer prices had their largest increase
in nine months in March. The morning report helped the U.S.
dollar trim some declines, putting further pressure on the
loonie. 
    Focus in the Canadian dollar market was trained on
Wednesday's Bank of Canada's policy statement and Thursday's
Canadian consumer price index (CPI) report for March.
    "We had a round of U.S. dollar strength (based on) a bunch
of headlines close together - everything from weaker earnings in
the U.S. to headlines about Ukraine - to just a bit of give-back
into the weekend after a week of U.S. dollar weakness," said
Camilla Sutton, chief currency strategist at Scotiabank.
     "So we're closing slightly lower in the Canadian dollar and
as we go into next week, when we have CPI and Bank of Canada -
an important fundamental week."
     The Canadian dollar ended the North American
session at C$1.0979 to the greenback, or 91.08 U.S. cents,
weaker than Thursday's close of C$1.0929, or 91.50 U.S. cents.
    Sutton said she expects the currency to stick close to
C$1.10 until it gets direction from the central bank or from the
inflation data.
    The CPI report is expected to show prices were up 0.4
percent in March from February and up 1.4 percent
year-over-year. Such an inflation reading would help further
ease fears of disinflation and eliminate residual concern that
the central bank might have to cut rates.     
     "The risk is on both inflation and Bank of Canada and I
think we're likely to stay close to C$1.10 leading into that as
the market is a bit nervous," she said.
    Analysts polled by Reuters this week unanimously forecast  
the central bank will keep interest rates on hold when it
releases its interest-rate policy statement and quarterly
Monetary Policy Report on Wednesday. But it may forecast a
slightly higher profile for inflation. 
    The poll predicted rates won't go up until the third quarter
of 2015. A more dovish central bank tone hit the loonie hard in
the past few months and markets will be watching to see if its
stance changes.
    Since hitting a 4-1/2 year low in mid-March, the Canadian
dollar has climbed about 3 percent, but it gave back some gains
over the last two days.
     Some recent signs of strength in the domestic economy, as
well as a weaker U.S. dollar were responsible for boosting
sentiment for the loonie after the intense selling pressure it
came under earlier in the year. Many analysts don't expect the
gains to last.
    "With the surprising strength in the loonie over the last
week or so, we got to an area where, in the short term, the
loonie is overvalued, in my opinion," said Scott Smith, senior
market analyst at Cambridge Mercantile Group in Calgary. 
    "I think with the rally that we've seen over the last couple
weeks, we could see that fade more and I don't think it's a far
stretch to say we could be back at C$1.10 to C$1.11."
    The central bank's policy statement poses a risk for the
loonie as the more positive sentiment for the currency recently
could set some investors up for disappointment if the central
bank maintains its dovish tone, Smith said.
    Canadian government bond prices were higher across the
maturity curve, with the two-year up 1.8 Canadian
cents to yield 1.045 percent and the benchmark 10-year
 up 44 Canadian cents to yield 2.394 percent.

 (Additional reporting by Leah Schnurr; editing by Peter
Galloway)
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