CANADA FX DEBT-C$ slips ahead of data; bond yields tumble

Wed May 28, 2014 4:49pm EDT

* Canadian dollar at C$1.0875 or 92.95 U.S. cents
    * 10-year yield at lowest since last June

 (Adds details, quotes, updates prices)
    By Leah Schnurr
    TORONTO, May 28 (Reuters) - The Canadian dollar weakened
modestly against the greenback on Wednesday but stayed stuck in
its recent trading range as a lack of economic data until later
in the week left it without a decisive catalyst.
    Canadian government bond yields tumbled alongside a drop in
their U.S. counterparts, sending the yield on the benchmark
10-year to its lowest level in nearly a year.
    Investors were looking ahead to Thursday's domestic current
account report and Friday's gross domestic product reading, both
for the first quarter. South of the border, GDP will be released
on Thursday.
    While the loonie has drifted higher so far in May, it has
stayed within a slim range as modestly improving economic data
has been balanced against the Bank of Canada's neutral policy
stance.  
    "That's the key piece right now for the Canadian dollar is
just how the central bank manages to almost dance around what we
have, which is an improving fundamental backdrop," said Camilla
Sutton, chief currency strategist at Scotiabank in Toronto.
    Once the market is clear of this week's data, attention will
be turning to the release of the central bank's latest policy
statement next week. Following last week's uptick in the
inflation rate, investors will be scrutinizing the statement for
any move away from the Bank of Canada's dovish tone.
    "That's the offset, is that we really need a shift in tone
from the Bank of Canada before we risk a significant Canadian
dollar rally from here," Sutton said.
    The Canadian dollar ended the North American
session at C$1.0875 to the greenback, or 92.95 U.S. cents,
slightly weaker than Tuesday's close of C$1.0861, or 92.07 U.S.
cents.
    The yield on the benchmark Canadian government 10-year bond
 fell to 2.224, its lowest level since June of last
year, as U.S. Treasury yields tumbled. U.S. bond prices were
supported by more month-end buying from institutional investors
and a drop in the German bond market.
    "From a fundamental perspective, it doesn't really make a
whole lot of sense, the yields are way too low for how the macro
backdrop is unfolding," said Mazen Issa, senior Canada macro
strategist at TD Securities in Toronto.
    "Some of the rally in the Canadian fixed income market is
also partially due to some seasonal effects, we tend to see
yields fall in the month of May."
    Bond prices were higher across the maturity curve, with the
10-year up 69 Canadian cents and the two-year up
3-1/2 Canadian cents to yield 1.037 percent.

 (Editing by Chris Reese)
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